Editorial: Dragon drags global economy

The impact of the slump in the Chinese economy is bound to be felt across the world in the coming days. Supply chain disruptions due to the coronavirus pandemic, which originated in China, have already dealt a massive blow to the global economy. The latest economic indicators emerging from Beijing are quite disappointing, a fact […]

The impact of the slump in the Chinese economy is bound to be felt across the world in the coming days. Supply chain disruptions due to the coronavirus pandemic, which originated in China, have already dealt a massive blow to the global economy. The latest economic indicators emerging from Beijing are quite disappointing, a fact acknowledged by Premier Li Keqiang. China’s economy grew at just 4.9% in the third quarter of 2021 – the slowest growth this year – as it is grappling with a crippling power shortage, disruptions in the global supply chain and sporadic Covid-19 outbreaks. Rising commodity prices and restrictions on the real estate market are adding to woes for the second largest economy in the world. Key metrics such as industrial production, retail sales and fixed-asset investment all fell below forecasts in July. The slowdown is adding pressure on the communist policymakers to help recover economic growth. The International Monetary Fund (IMF) has estimated that the Chinese economy is likely to grow at 3.3% this year. Acute power shortage has prompted the authorities to impose rationing of electricity supply to the industries. Plunging coal supplies and Beijing’s climate change policies have created a perfect storm disrupting global supply chains. The global worries about a possible spillover of credit risk from China’s property sector into the wider economy have also intensified as Evergrande Group, a major developer in China, wrestles with more than $300 billion of debt. As winter approaches, there are fears of ‘twindemic’ – a likely combined increase in Covid-19 outbreaks and influenza cases across the country.

China’s steep power cuts, coupled with the property sector slowdown and regional Covid outbreaks, could have an adverse impact on the GDP growth in the coming months. And the risks to the GDP forecasts could be much larger as disruptions to production and supply chains feed through. Another factor that might affect the growth is the crackdown on major internet technology companies for alleged monopolistic practices. Consumer spending, the major driver of Chinese economic growth, has been sluggish since the pandemic as Covid-related restrictions have kept many people from travelling and eating out. China has enjoyed decades of double-digit growth, thanks to its low-cost exports of machinery, equipment, and consumer products. But, the economy has slowed from a 10.6% growth rate in 2010 to a 2.3% growth rate in 2020, largely due to the global pandemic. A prolonged slowdown in China would have substantial global spillovers. Already, major exporting nations in Europe and East Asia are feeling the pinch due to falling demand for manufactured goods, causing Germany and South Korea to post rare deficits with the world’s second-largest economy. Economists are lowering their expectations for the Chinese economy as the country’s coronavirus cases remain high, suggesting more restrictions in the near future.

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