Last Looks at the Pre-War World (2): China Bounces Off the Lows?
Last Looks at the Pre-War World (2): China Bounces Off the Lows?
A surge in credit growth and an intensification of foreign exchange intervention has helped power a boost in investment and exports. But consumer demand and housing remain weak.
China’s experience of the pandemic has been the mirror image of America’s.
While the U.S. government failed to control the disease through quarantines in 2020, it did a tremendous job supporting consumers’ incomes through generous transfer payments. It also did an impressive job helping pharmaceutical manufactures develop highly effective vaccines, which eventually neutralized much of the social and economic damage of the pandemic. (After 1 million Americans had already died.) By the eve of the Russian invasion, the U.S. economy was booming.
In China, by contrast, the government successfully suppressed the virus through extreme lockdowns, but it failed to help ordinary Chinese weather the economic shock. Tens of millions of migrant workers were forced to abandon the cities for the countryside to survive. To the extent it did anything, the Chinese government subsidized exporters and fixed investment through cheap credit and currency intervention. That led to a rapid recovery in the early stages of the pandemic, driven by homebuilding and by selling goods to foreigners.
By mid-2021, however, the government had shifted gears in the name of “common prosperity”. The party-state cracked down on businesses ranging from software to education to real estate. Meanwhile, national chauvinism limited the use of the most effective vaccines and severely undermined vaccine uptake among China’s elderly. The country has quarantined itself from the rest of the world, while entire cities continued to face the threat of being locked down. So despite an early and vigorous rebound from the lows of February 2020, the Chinese economy spent much of 2021 slowing down—and that was before the Omicron variant led to a new round of severe lockdowns.
The latest data suggests that China’s economic policymakers have reversed course once again in response to the ongoing weakness. While Chinese consumers continue to fall further behind, the government has opened the credit taps to juice investment, while continuing to prevent the yuan from appreciating significantly by intervening in the foreign exchange markets.
Before moving on, I recommend reading (or rereading) the following notes for background:
Understanding China's Latest RRR Cut (July 15, 2021)
What is Going On in China? (September 2, 2021)
China's Faltering Recovery? (November 19, 2021)
China's Credit Tightening and Financial Outflows (November 20, 2021)