Global stagflation risks offer China chance to ‘seize opportunity’ for economic, trade windfall
- Decades-low ebb in global economic cycle could hit US economy while destabilising US dollar’s position and sending EU back into debt crisis, prominent Chinese economist warns
- If 1970s-style stagflation hammers West, China could move up global value chain, but downsides remain amid competition from developing economies
A heightened risk of stagflation is likely to make the United States more dependent on Chinese supplies while simultaneously presenting Beijing with a strategic opportunity to move up the global value chain, according to a prominent Chinese economist.
As consumer prices in the US, European Union and United Kingdom have soared at the fastest rate in decades, coupled with international organisations slashing their economic growth forecasts for this year, warnings have been growing louder that the global economy could slip into 1970s-style stagflation.
But such a situation, despite being a double-edged sword for China, would present the world’s second-largest economy with more opportunities than challenges, says Liu Yuanchun, president of the Shanghai University of Finance and Economics.
On a global scale, stagflation – a portmanteau of “stagnation” and “inflation” that describes an economy with little to no economic growth amid soaring prices – would also make it more difficult for the US and EU to decouple from China’s industrial and supply chains, according to Liu, who is also a government adviser.
“Due to the rising costs of living and production in the US, [America’s] dependence on Chinese supplies – Chinese products – will be stronger,” he said at a webinar held by the China Macroeconomy Forum think tank on Saturday.
He argued that the surging costs of labour and raw materials will make it more difficult for countries with slow technological advances to displace China’s manufacturing, while the US will be at risk of intensifying its domestic price pressure if reshoring occurs in some industries.
Given that, Liu said, Washington’s efforts on the supply-chain front to rein in China’s expansion look to be hampered.
US Secretary of State Antony Blinken said the US still wants trade and investment with China as long as they are fair and do not jeopardise US national security.
Liu also said that severe distortions in the entire capitalism system – rather than Russia’s invasion of Ukraine, or the coronavirus pandemic – are to blame for the rising risk of stagflation.
He said the crisis is likely to mark the beginning of a once-in-50-years low ebb in the global economic cycle. And this, he said, could result in a hard landing for the US economy, while the US dollar’s position could be destabilised, and a European debt crisis could re-emerge.
He linked the picture today to that of five decades ago, when stagflation caused a recession in the US, while the opposite happened in the former Soviet Union.
“We need to learn from the lesson that the Soviet Union failed to seize the opportunity … in the 1970s,” he said. “We must take the initiative to carry out comprehensive reforms – real reforms – to truly smooth out domestic circulation and readjust our mechanism for innovation.
“We should not provoke the US and Europe … but rather wait for their stagflation to get worse, and for these regions to be further weakened from the Russia-Ukraine conflict.”
Beijing is already gauging the impact of global inflation on the Chinese economy, which has seen only a moderate rise in consumer prices while being hard hit by strict coronavirus-control measures.
Liu also said that China’s huge production capacity could help absorb the imported price pressure, but he noted that more response policy instruments are needed.
He said that higher export prices had improved the country’s trade conditions, and that rising energy and basic commodity prices could give a boost to China’s new energy and emerging strategic industry sectors, helping the country become a global centre in those areas.
“[China] should further map out the new energy strategy and scramble for strategic high points,” he said, adding that Beijing should revisit its industrial policy to promote more technological progress.
Other economists, meanwhile, are warning that China should not be over-optimistic about the potential opportunities that may result from a bout of global stagflation.
That includes Xu Hongcai, deputy director of the Economic Policy Commission under the China Association of Policy Science.
Other developing economies such as Vietnam and Mexico have cost advantages over China in low-end manufacturing, while the West has been enhancing its stranglehold on hi-tech goods such as semiconductors.