About the author: Desmond Lachman is a senior fellow at the American Enterprise Institute. He was formerly a deputy director in the International Monetary Fund’s Policy Development and Review Department and the chief emerging market economic strategist at Salomon Smith Barney.
In 2009, in the aftermath of the Lehman Brothers bankruptcy, China’s economic policymakers saved the world economy’s bacon. They did so by providing massive monetary policy support to the Chinese economy and by taking measures to prevent Chinese currency depreciation. That allowed the Chinese economy to become the world economy’s principal economic growth engine at a time when the rest of the global economy was in shambles.
Fast forward to today. The world economy once again finds itself in a difficult position. It could benefit from a booming Chinese economy. With inflation at multi-decade highs in the advanced countries, their central banks are now becoming decidedly more hawkish. That could precipitate an advanced country economic recession as efforts are made to get the inflation genie back into the bottle. At the same time, the International Monetary Fund is now warning about the likelihood of debt crises in many highly indebted emerging market economies as a consequence of the Russian war-induced surge in energy and food prices.
Unfortunately, this time around the Chinese economy is in no position to once again play the role of the world economy’s locomotive. Indeed, beset by a host of its own problems, China, the world’s second largest economy, could soon become part of the world economic growth problem rather than the solution.
Even before the renewed Covid surge in China and Russia’s Ukrainian invasion, the Chinese authorities recognized that their economic growth model had become overly reliant on the credit and property markets. That model had led to a situation where over the past decade Chinese private sector credit increased by around a staggering 100% of gross domestic product, or at a faster rate than that which preceded the bursting of the Japanese and U.S. property bubbles in 1992 and 2006, respectively. It had also led to a situation where the property sector accounted for around 30% of the Chinese economy, house prices as a ratio to income were higher in major Chinese cities than in New York and London, and an estimated 65 million Chinese housing units remained unoccupied.
That the Chinese credit and property-led growth model had run its course was plain for all to see toward the end of last year. The country’s economic growth rate slowed to barely 4% or around half the 8% average growth of the past decade. It was also in evidence when China was struck by a wave of defaults in its property sector. Those defaults included most notably that of Evergrande, the world’s most indebted property developer, with a debt of some $300 billion.
Transitioning to a more balanced growth model will not be easy for China. Today’s challenging global economic environment will preclude any Chinese effort to export its way out of its economic problems. Making the transition all the more difficult now are a series of homegrown and external economic shocks.
Among the homegrown shocks have been China’s recent no-tolerance Covid policy that has resulted in the strict lockdown of some 400 million Chinese residents. President Xi Jinping’s recent clampdown on many large Chinese tech companies in order to maintain political control has also hardly been helpful in paving the way for a smooth economic transition away from the property sector.
Among the external shocks to which China is now being subjected is the Russian-induced surge in oil, grain, and metal prices. China is the world’s largest commodity importer. Skyrocketing international commodity prices are the last thing that its struggling economy now needs.
All of this suggests that this time around, the world could have a synchronized global economic recession without a buoyant Chinese economy to bail it out. If ever there was a need for U.S.-led world economic policy coordination to set the stage for an orderly global economic recovery, it has to be now.
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