Why China May Not Come to the Rescue of the World Economy Again

China’s massive stimulus package aided in the recovery of the Western world following the financial crisis of 2008. Nevertheless, this time around, China’s recuperation following the COVID-19 pandemic is inconsistent, and due to geopolitical problems, it is improbable that it will prevent a worldwide economic decline.

As the global economy faces a potential recession, Western policymakers are concerned about China’s uneven recovery since it has been the primary driver of worldwide economic growth since the 2008 financial crisis. Unfortunately, this is exactly what is happening.

China, which abandoned its three-year zero-COVID policy in December, is not experiencing robust economic growth. In April, imports to China dropped sharply by 7.9%, while exports increased at a slower rate of 8.5% compared to 14.8% in March.

Additionally, consumer prices rose at the slowest rate in more than two years, and factory gate deflation, which is the prices offered by China’s industrial wholesalers, worsened. Moreover, new bank loans extended in April were much lower than anticipated, with lenders providing 718.8 billion yuan ($104 billion/€94.5 billion) in new yuan loans, less than one-fifth of the amount in March.

Steve Tsang, director of the China Institute at the School of Oriental and African Studies in London, stated that while China’s economy is not on the verge of collapse, it is not returning to the double-digit growth of the “golden decade” of the 2010s. A strong recovery in China would aid in mitigating an anticipated slowdown in other regions of the world, brought on by central banks tightening monetary policies over the past 12-18 months. China’s substantial post-financial crisis stimulus contributed to reviving the global economy, largely because of its high demand for imported raw materials for infrastructure projects.

China’s previous stimulus policies have resulted in a significant amount of debt, as the International Monetary Fund cautioned in March that local government debt alone had reached a record 66 trillion yuan, equal to half the country’s GDP. According to Steve Tsang, Western policymakers who are relying on China to revive their economies must assess the new political and economic realities objectively.

China’s tensions with Taiwan, its close relationship with Moscow, and its neutrality over Russia’s invasion of Ukraine have also jeopardized global economic collaboration. If tensions or war escalate between China and Taiwan, multinational corporations may leave China, its export markets may be shut down, and sanctions may be imposed.

The trade tensions between Beijing and Washington, which began during the Trump era, have persisted through Joe Biden’s presidency, resulting in tit-for-tat tariffs and US sanctions on Chinese firms and officials. Xi Jinping’s assertive foreign policy has prompted the United States and other Western countries to decouple or de-risk their economic ties with China, according to Tsang. This has weakened a critical factor that had previously fueled China’s rapid growth.

China’s Belt and Road Initiative, a massive investment in infrastructure projects in more than 150 countries, is increasingly viewed as a threat to Western interests by policymakers. Many believe that the initiative has lured developing countries into taking on large and unaffordable loans, while simultaneously weakening their ties with Western countries.

European Central Bank President Christine Lagarde also expressed concern about the potential for the global economy to fragment into rival blocs led by China and the US, which could harm growth and increase inflation. Another reason for China’s slower recovery is that Beijing is prioritizing quality growth over quantity growth by shifting the economy up the value chain.

This strategic plan involves moving away from low-end manufacturing and heavy industries dominated by state-owned companies and focusing on innovation and domestic consumption, which will result in a natural slowdown in growth.

According to Steve Tsang, President Xi Jinping’s policies are holding back the Chinese economy, despite his desire to make it more innovative and strong. Tsang believes that Xi’s tight grip on power and unwillingness to acknowledge errors prevent technocrats from making necessary changes to boost the economy.

However, the International Monetary Fund predicts that China will continue to be the primary driver of global economic growth for the next five years, contributing more than double the amount of the United States. Despite slowing Western demand, the Chinese economy can still rely on domestic demand, with pent-up demand from COVID lockdowns and $2.6 trillion in excess savings accumulated by Chinese consumers during the pandemic, which may stimulate the services sector in the short term.