The United States is stepping into recession, with Europe in tow. The rumblings of a global recession can be heard in many other economies. Fearfully, inflation is at the doorsteps of major nations. Putin’s expansionary expedition in Ukraine is walloping Europe with hard punches. Germany is beginning to dilute its dalliance with Russian oil and gas. Serious enough for Europeans to spend the night awake.
The stench of recession is now hitting Chinese nostrils. Stringent Covid-19 lockdowns and suicidal zero-covid strategies has become the new-normal in the whole of China. The result is alarming, at least for the ‘Middle Kingdom’. China, the economic propeller of the world, is faltering. China is in recession and this will have an impact on the planet as a whole. Geopolitico-economic watchers have turned Cassandras overnight. Is a China crash imminent? Is it a bow-out time now for its autocract-architect Xi Jinping?
Supply Chains Snapping
The story begins in USA. Consumer inflation there is at a 40-year high. Efforts to rein in this inflation is straining the economies in various regions, including China’s. Add to this the cracks in China’s covid picture. The pandemic and its Omicron variant are causing serious headaches for China. Xi’s fanatical obsession with his zero-covid policy has led to strangulating lockdowns, imposed to the point of snapping global supply chains. Inevitably, surging inflation in USA and Europe is finally pulling China into its embrace.
With the Ukraine war continuing, global food and energy prices continue to remain on the upswing. Faced with such a serious crisis and seen against the throttling lockdowns, China-watchers tend to ask will Xi and his warriors remain goofproofed as before? As a response, you see nothing but furrowed foreheads.
The murderous interest rate hikes by the US Fed amid this chaos are ensuring the noose stays tightened around global imports. In turn, this is wrecking the global financial markets. The Ukraine War is deepening the recession worldwide. This is dealing a bodyblow to business confidence. The effects of these will shake China which has its markets spread out.
Sure, China has been slowing down for a while now. These negative factors will accelerate the slowing-down, an unwelcome double-whammy for China. While covid continues to remain uncontrolled, the Chinese economy lies in tatters. A lose-lose situation it is. China was already showing negative growth in certain sectors and regions this year. Retail sales have shrunk and exports are hit. These are bound to get widespread. The reasons are there to see.
As long as China continues to consider zero-covid as a paramount priority, it will slap such stringent lockdowns mercilessly. The utmost indifference to long-term consequences to the economy is quite characteristic of a totalitarian regime. So, it means embarking on a trip down the road to self-destruction.
Despite ballooned Covid containment expenditure, hollowed out government buildings, locked-down millions, squeezed economic activity and a unitary single-minded obsession with zero-covid targets, there is no let-up in the viral wave. These anti-covid efforts and the numerous quarantine centres will help accelerate China’s descent into recession.
The ongoing war in Ukraine is sending negative vibrations across the planet. The war-triggered risks are mounting. Growth is already weak. If this war turns nuclear, the consequences will be terrible, particularly for China. Common knowledge it is, China has forged economic relations across the globe. Thus, China will have to face widespread self-erasing sanctions.
With Russia and China on the radar, global defence expenditure is bound to balloon. China will have to divert much of its productive investments into defence projects. This will increase the odds of recession in China. A collapse in Europe or United States too can trigger a collapse in China. Already, the Purchasing Manager’s Index has dipped below 50, a sure sign of a suicidal contraction. A contraction in Shanghai is contraction of China and its hitherto flamboyant economy.
Portrait Turning Sorry
Recently, most contractions in China happened in double-quick time and they were largely due to blind crackdowns by regulators. Their policing batons were used indiscriminately on growth sectors. Tech companies were one of them. While these actions ensured tech firms were put to slow death, murderous lockdowns and merciless bans on Messenger RNA vaccines turned the situation into a quick-demise moment. The sole aim behind these crackdowns and the zero-covid policy was to boost Xi’s image.
This unifocal aim is hurting China in many other ways. China pulled out of an Asian football event, for instance. Expect more such pullouts and cancellations in the spheres of culture, trade and foreign affairs too. Such face-losses will set off unpleasant ripple effects and inflict cracks in China’s image as a powerhouse and Xi’s image as a no-nonsense reformer.
Profligacy Tales Multiplying
As China and Xi get more image-conscious now, covid journalism will remain low on honesty and objectivity, placing question marks on China’s integration into the global mainstream. Over the long haul, this is bound to hit China’s economic superiority. The Chinese economic front is not pleasant now to look at. China’s l’affaire Evergrande is already a legendary tale in profligacy and indebtedness. High-profile infrastructure projects of China, both domestic and overseas, have begun showing signs of slowdown. Once again, mounting debts were the culprits.
Fiscal and monetary efforts, incentives and rate cuts, are proving to be dabs of ointment for a coronary disorder in the face of single-minded zero-covid obsession. With mounting debts, cost of capital is rising, corporate bottomlines are under squeeze and price-earning multiples are heading South. Expectedly, foreign investors with their hot-money are hurrying towards the exit door. As a result, instances of supply-chain relocations are becoming commonplace.
China has always been an expansionary rogue. Now, with its overt backing for Russian aggression in Ukraine, global investors and geopolitical observers are re-rating China. They have placed China on an elevated risk platform now. Ask major asset managers present in China. They will tell you why have they downgraded Chinese equities. The rationale is simple. Global money managers see China’s open support for Putin’s aggression in Ukraine as an unwritten and unspoken quid pro quo for the future.
Back me when I take over Taiwan militarily and support me in international forums, the quid pro quo is quite evident. Geopolitical observers thus see a Taiwan aggression happening soon. So, global investment chiefs are assigning higher risk-values to Chinese assets. The results of these deeds and developments are out there. Scramble for selling onshore securities, waning romance with yuan-denominated bonds and steep declines in the values of foreign-held equities in China, it cannot get any worse for China.
Quite explicably, foreign investors are fast whittling down exposures to Chinese equity. If these negative actions persist, China’s image as a great investment destination will be truly in peril. Already, these waves of pessimism are hurting Chinese startup entrepreneurs, who feel their fears of a Chinese aggression in Taiwan are fast turning real. This fear, after the zero-covid fiasco, will be the sole destructive factor for China. A military aggression in Taiwan will surely turn matters upside down for Chinese economy.
As insanity trumps ideology, as obsession trumps objectivity and as autocracy trumps all-embracing inclusivity, China’s descent into hell is certain. Sans succession planning, Xi is taking China down faster. As fleeing rats are signs of a sinking ship, fleeing foreign investors could be telling what is next in the China-Xi story. Chaotic covid policies and an overbearing one-man politics will surely crash China.
Sensible it will be to dissolve now all formations which have China as a member. The Chinese will tell you they are gradually discovering both Xi and his brand of politico-economics are beyond their control and understanding. Thereby hangs a tale of an egregious expansionist and his erosive empire. What is happening in China today is the trailer.