China, the world’s second-largest economy, has been facing a series of challenges in recent years, from the trade war with the US, the Covid-19 pandemic, the debt crisis of its property giant Evergrande, to the regulatory crackdown on its tech and education sectors. These factors have contributed to a slowdown in China’s economic growth, which fell to 4.9% in the third quarter of 2021, the lowest since the end of 2020. In this article, we will explore some of the reasons why China is in so much trouble and what are the implications for the global economy.
The Trade War with the US
One of the major sources of tension between China and the US is their trade imbalance, which has been widening over the years. In 2020, China’s trade surplus with the US reached a record high of $317 billion, as China exported more goods to the US than it imported from it. The US has accused China of unfair trade practices, such as currency manipulation, intellectual property theft, and subsidies to state-owned enterprises. In response, the US has imposed tariffs on hundreds of billions of dollars worth of Chinese products, and China has retaliated with its own tariffs on US goods. The trade war has hurt both economies, as it has reduced trade flows, increased costs for consumers and businesses, and disrupted global supply chains.
The Covid-19 Pandemic
Another factor that has affected China’s economy is the Covid-19 pandemic, which originated in Wuhan, China, in late 2019. China was the first country to impose strict lockdowns and travel restrictions to contain the virus, which led to a sharp contraction in its economic activity in the first quarter of 2020. However, China also recovered faster than most other countries, as it managed to control the outbreak and resume production and consumption by mid-2020.
China was the only major economy to register positive growth in 2020, at 2.3%. However, China’s recovery has been uneven and fragile, as it has faced periodic outbreaks of new variants of the virus, such as the Delta variant, which have forced it to reimpose lockdowns and curbs in some regions. China’s zero-tolerance policy towards Covid-19 has also hampered its external trade and tourism, as it has maintained strict border controls and quarantine requirements for inbound travelers.
The Debt Crisis of Evergrande
Another challenge that China is facing is the debt crisis of its largest property developer, Evergrande Group, which has accumulated more than $300 billion in liabilities. Evergrande has been struggling to repay its creditors and investors, as it has faced a liquidity crunch due to a slowdown in the property market, tighter regulations on borrowing by real estate firms, and a loss of confidence by customers and suppliers. Evergrande’s default risk has raised fears of a contagion effect on other property developers, banks, shadow lenders, local governments, and households that are exposed to its debt or products. Evergrande’s woes have also weighed on China’s stock market and currency, as well as global financial markets that are concerned about the spillover effects of a potential collapse of China’s property sector.
The Regulatory Crackdown on Tech and Education Sectors
Another factor that has dampened China’s economic prospects is its regulatory crackdown on some of its most dynamic and innovative sectors, such as technology and education. In recent months, China has introduced a series of measures to rein in the power and influence of its tech giants, such as Alibaba, Tencent, Didi Chuxing, and ByteDance. These measures include antitrust investigations, fines, data security reviews, cybersecurity laws, and bans on overseas listings. China has also imposed strict rules on its private education sector, such as banning for-profit tutoring on core subjects and foreign ownership of education firms. These moves have been driven by Beijing’s concerns over national security, social stability, data privacy, consumer rights, and ideological control. However, they have also eroded investor confidence and market value of these sectors, as well as stifled innovation and competition.
The Implications for the Global Economy
China’s economic slowdown has significant implications for the global economy, as China is a major driver of global growth, trade, and investment. According to the International Monetary Fund (IMF), China accounted for about 28% of global growth in 2019, more than any other country. China is also the largest trading partner for more than 120 countries, including many developing and emerging economies that rely on China’s demand for their commodities and exports. Moreover, China is a major source of foreign direct investment (FDI) for many countries, especially those involved in its Belt and Road Initiative (BRI), which aims to build infrastructure and connectivity across Asia, Africa, and Europe.
Therefore, a slowdown in China’s economy could have negative spillover effects on the rest of the world, especially if it triggers a financial crisis or a hard landing. A financial crisis in China could disrupt global financial markets and increase the risk of contagion and defaults. A hard landing in China could reduce global growth and demand, and exacerbate the existing challenges of the Covid-19 pandemic, climate change, and geopolitical tensions. On the other hand, a soft landing in China could provide an opportunity for the global economy to rebalance and diversify, and for China to pursue structural reforms and sustainable development.