China has put in place a zero covid policy which is seriously hurting its economy and which it should “recalibrate” to boost growth. The International Monetary Fund (IMF) itself advises it after calculating that the Asian giant will grow only 3.2% this year and 4.4% the next two, figures that ensure the expansion of its economy but at a rate much lower than before the pandemic.
The blockades of the cities to stop the spread of the virus “weigh on consumption and private investment, even in the housing sector”, currently the main economic problem of the state. For this reason, the IMF considers that China should speed up vaccination and take more actions to end the real estate crisis and boost the consumption of its citizens.
The main reason behind this policy – which aims to eliminate any transmission of the virus – is the country’s weak healthcare system. Ramón Gascón, coordinator of the Asia-Pacific working group of the Exporters Club, indicates that a high level of people infected by covid would cause sick leave that cannot be allowed and that the health system could collapse by not being prepared for a proportional number of admissions to what happened in Europe or the United States at the beginning of the pandemic. “It doesn’t look like this policy is going to change any time soon because they don’t have the same level of immunity that we have in the West,” he explains.
“Reversing the zero covid policy would mean for the Chinese government to admit a mistake”
Joseph Comajuncosa
Professor of Economics at Esade
In addition, it must be taken into account that the Chinese government has made this strategy against covid its banner because at the beginning of the pandemic it was very successful. “Going back now would imply admitting a mistake,” says Josep Comajuncosa, professor of Economics and Finance at Esade in the same vein.
It is evident that the closure of borders and ports does not favor economic activity. But beyond that, the fact that the Chinese economy grew by more than 10% year-on-year before the great crisis of 2008 was difficult to maintain afterwards. The rise of the Asian giant was consolidated at 6%-7% thereafter and that trend was interrupted by the pandemic when it grew only 2% -a milestone in itself considering the collapses in GDP suffered by other great powers like the United States and Europe in 2020-. This is influenced by the change in the economic model from a country highly based on exports and investment, to one with more eyes on family consumption and public services.
The “trap” of middle-income countries
Comajuncosa explains that this conversion to a middle-income economy requires growth rates that are never that high. The Chinese government expected to settle on 6% growth as its usual rate, but that is not happening. “The pandemic and the longer consequences of the closures that are still taking place affect the economy a lot,” says the professor, who also indicates that there is an open discussion about whether China is in the “trap of middle-income countries ».
Although it is difficult to compare because none is as big as China, it could be similar to what has happened in some Latin American countries such as Mexico or Peru, as well as Turkey. They are countries that manage to grow to that stage by taking advantage of their natural resources or cheap labor, but once they reach that point of growth they fail to join the group of developed countries. It has also happened to Brazil or South Africa, they remain “stuck”. “The change in model was something desired by the Chinese government because it implies a dispersion of wealth towards broader layers of the population, but their idea was to continue growing at around 6% and this is not being fulfilled,” explains Comajuncosa.
“China will not go back to being what it was, but it doesn’t need it either”
Ramon Gascon
Asia-Pacific Coordinator of the Exporters Club
Analysts agree that China will not go back to being what it was, but “it doesn’t need to be either”: “It’s like climbing a mountain, there comes a time when you reach the top and you only have to go down, although it is still a ‘player’ of the first order in the world”, assures Gascón.
Inflation and monetary policy
Its PMI indices confirm this theory. The Chinese economy recovered in the third quarter (3.9%) after the quarterly contraction in the second (-2.7%), but the activity data is not particularly optimistic. The manufacturing PMI (which measures the level of industrial activity) remains below the 50 level, indicating economic contraction. In November the indicator reached 48 points, from 49.2 points in October, its lowest level since April. The PMI for non-industrial activity fared even worse, sinking to 46.7 points in November, also the worst reading since April. “These data reflect the weakening of global demand with China, although the difficulties related to the zero covid policy also continue to weigh down national activity,” says Ebury’s director of Risks, Enrique Díaz-Álvarez.
At a time of inflationary crisis in the Western world, the price rates in China are striking, since they have not exceeded 2.8% this year. Controlling its own currency (the yuan), the government has continued to ease monetary policy to try to support the economy and take some of the pressure off the harsh pandemic restrictions. The position of its central bank contrasts with that of its counterparts both in Asia and especially in Europe (ECB) and the United States (Fed).
The problem is the risk this has posed to the yuan in recent months, although a pause in the easing cycle should limit depreciation pressure on the currency. “China’s easing has taken advantage of price pressures, although an increase in inflation towards the central bank’s target of 3%, and the recent fall in the yuan may prevent extra easing,” warns Díaz-Álvarez. Headline CPI inflation rose to 2.8% in September, its highest level since April 2020. That said, the sharp decline in output price inflation (0.9% from over 13% at the end of the last year) may contain the rise in consumer prices in the medium term.
Bring production closer to home
The objective of Europe since the pandemic became aware of its lack of supplies is to bring production closer and stop depending so much on China. But it is a goal that is not achieved in two days. “There is a consensus that dependency cannot be so high, but we have to see how to bring that down to reality and which countries can benefit the most, such as Vietnam,” explains Gascón.
For his part, the Esade professor, Comajuncosa, assures that if Europe had decided a decade ago to cut itself off from its dependence on China, it would have done much more damage to the economy of the Asian giant, much more based on exports, than it is now. “Globalization is slowing down, but it is becoming a regionalization of the global economy where China could be the major exporter in the entire Asia-Pacific region,” he says.
This new trade policy forces China to reorient itself, which may slow down growth for a period, but then return to normal “if you choose your importing countries well.” Thus, China is now looking towards the rest of Asia, Africa and Latin America.
Moving away from China is “very difficult” for Spanish exporters
The warning comes from the businessmen dedicated to exports: “Relocalizing global value chains from China will not be fast nor will it be achieved in the short term.” The experts gathered by the Exporters Club assured in an event organized by the consulting firm Iberglobal that although this process has already begun, it is “very difficult” to replace the Asian country as the main production center and they assure that currently “no territory in the world has its features”.
At the meeting, the director of AON’s Global Risk Consulting, Carlos Bereciartua, highlighted the concern that companies are currently feeling about the economic and human costs involved in changes in the supply chain. “Companies are aware that a restructuring of the value chain implies a series of monetary and human resource costs, and that not all companies have the muscle to face it at this time,” he said.
The possible new commercial partners of the Spanish companies would be the countries of the ASEAN (Association of Southeast Asian countries) because they are “comfortable in terms of supplies and known by the Spanish market”. On the other hand, they lamented the opportunity that Latin America is losing to take over from China in global value chains and pointed to Morocco as an interesting option for Spanish companies.