China’s economic woes – unlike the US and EU’s – will fade with the pandemic
- While the world’s major economies are slowing down, China faces a different kind of economic problem from the US and the EU
- In China, the issue is inadequate demand, which has been flattened by lockdown measures. The solution then is to wait out the zero-Covid policy
There is no doubt that the global economy is entering an era of recession. Across the board, among the world’s major economies, we are seeing slower growth coupled with inflation.
The strengthening dollar and the flow of capital to the US have created devastating ripple effects across the globe, especially on the emerging economies overloaded with dollar-denominated external debt.
Stagflation – slow growth coupled with inflation – appears to be here to stay. But it is worth noting that the kind of economic problem we are facing in China is quite different from that in the US and the EU. And as a result, the macro policy instruments are also different.
How and if policymakers in these three largest economies can coordinate and lead the global economy out of recession remains a great challenge.
With the US economy, the cause of the problem is overheated aggregate demand. Rounds of Covid-related economic relief – effectively, the Fed’s money printing scheme – are finally coming back to roost. The US job market is still very strong, with the unemployment rate for August at less than 4 per cent, even after rounds of interest rate hikes.
Inflation is the result of a combination of forces, including the run-ups in commodity prices mostly triggered by sanctions on Russia, the lingering effect of pandemic economic relief on demand, and the accumulative effect of a long era of low interest rates that drove excesses in investment. In short, it is economic disequilibrium characterised by aggregate demand exceeding aggregate supply.
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The European Union also faces disequilibrium, but it is driven by the supply shortfall due to the war in Ukraine.
In China, however, the economic challenge is inadequate demand, with domestic consumption currently being the weakest link. The supply chain network in China is still cranking out goods and has proved to be reliable so far. But the country cannot and should not export its way out of recession.
Indeed, China is in a more comfortable position than the US and EU, because it faces an easier challenge from a macro policy perspective. The US and EU have to deal with the painful problem of curtailing demand, while in China, it is the opposite – the need to increase demand.
But demand – post-pandemic demand, in particular – is usually automatic, as long as the public health policy that is constraining demand and consumption is removed.
So my suggestion is simple. Patiently hang in there for a little more, till the policy changes. Most countries in the world have already moved on, and it is just a matter of time before China follows. The cure for China’s current economic difficulties is not economic policy but rather public health policy.
John Gong is a professor at the University of International Business and Economics and a China Forum Expert