China's Unbalancing Is Going Into Overdrive
Squeezed consumers and homebuilders are forcing up the trade surplus via stagnant imports. And higher lending to local governments likely reflects cashflow problems rather than help from the center.
China’s trade surplus is soaring thanks to “Covid Zero” and the ongoing crisis in the real estate sector. Domestic spending is being squeezed, which is holding down imports even as exports continue to hold up. The result is a great “unbalancing”, with debt rising relative to income and a smaller share of Chinese production enjoyed by ordinary Chinese.
The unbalancing of 2022 is, in many ways, a continuation of what has happened since the virus first emerged in 2020.
The Chinese government’s initial public health response to the pandemic succeeded admirably in saving a substantial proportion of the Chinese people from avoidable infection, hospitalization, and death,1 but the government’s economic response to the pandemic was unusually tightfisted. In stark contrast to most other major economies—but like Mexico—Chinese consumers and workers were left in the lurch by a government with no desire to repeat the excesses of the 2008-2010 stimulus. At best, some select businesses were eligible for tax credits and subsidized loans, while exporters were helped through surreptitious efforts to hold down the international value of the yuan.
China’s initial policy response ensured that manufacturers kept producing and selling their wares abroad even as ordinary Chinese were forced to cut back on the things they wanted. Exports rose while imports plunged, and the trade surplus expanded from $240 billion in 2019 to $398 billion in 2020. The initial hope was that the end of the lockdowns would lead to a healthy recovery powered by consumers’ “revenge spending”, with the economy “rebalancing” as policymakers had long claimed they wanted.
Unfortunately, three things have gotten in the way:
Many Chinese lost income during the pandemic, which limited their ability to splurge once restrictions were lifted. Consumers weren’t even in a position to meaningfully increase their spending before the most recent variants emerged, much less offset declines in the rest of the economy.
The Chinese government turned against the housing sector last summer. There were good reasons for doing this, especially after the 2020-2021 property boom that China experienced alongside much of the rest of the world. But it was always going to be tricky to manage the transition given the importance of housing as an asset for savers and as a revenue source for China’s local governments. Moreover, it was never clear how the government could gradually squeeze out any excesses without inducing a severe self-reinforcing downturn.
Most recently, the Chinese government has decided to rely on draconian lockdowns as its primary tool for containing the newer covid variants, rather than vaccines or other pharmaceutical treatments.
The latest data confirm that the combined impact on China’s domestic economy has become increasingly painful, with ambiguous consequences for the rest of the world.