China has stumbled. With the country entering a period of deflation that some have described as “economic long Covid”, growth is stalling. The IMF projects it slowing to less than 4 per cent over the medium term – not bad by the standards of most developed western economies, but a far cry from the decades of near-miraculous growth that have made China an economic superpower.
The economy expanded just 0.8 per cent between the first and second quarters of the year. Yet over the past decade, booming China had been the source of more than 40 per cent of global economic growth.
A weakening Chinese economy signals a worrying shrinking of international demand for major goods from soybeans harvested in Brazil, to US beef, to luxury goods from Italy, to raw materials from the developing world. That’s bad for the outlook for global growth. China is now the largest commodity consumer in the world.
Post-Covid slump, Beijing faces a host of economic challenges, from a liquidity crisis in the property sector with the country’s largest private homebuilder, Country Garden, ominously missing payments on international bonds, to a sharp fall in exports, flagging foreign investment, and sustained weakness in consumption. In July growth slowed in retail sales and industrial production, while new construction starts were down by a quarter year on year.
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The regime is jittery about domestic political fallout. It has moved to stop publication of data on youth unemployment, weeks after the latter hit a record level of 21.3 per cent. Exhortations to the young to lower their expectations and take less skilled jobs have not gone down well. A measure of government unease is also seen in earlier than expected cuts in interest rates to stimulate weak demand.
The move into deflation has again fuelled calls for more government stimulus to help grow consumer spending and services, long seen by economic observers as crucial to sustaining China’s growth model.