The economic and financial consequences of the Covid-19 pandemic and of the Ukraine invasion by Russia, which are adding to themselves and during more than forecasted in the Western countries are so heavy that it is not anymore excessive to talk about a global crisis. China has not been saved due to its very strict policy and to the breakout of supply chains built during the last decades and which were at the origin of the globalization. At the eve of the 20th Congress of the Communist Party which will decide, in all probability, to give a third five-years mandate to the president Xi Jinping, the Chinese economy is confronted with a double challenge, to protect itself against the effects of the crisis which hurts the United States and Europe and to pursue the rebalancing of its growth toward the national market along with strengthening its presence in the high technologies.
The inflationist wave which hurts the U.S. has generated a tough because too late reaction of the Federal Reserve. The interest rates rebound is at the origin of the dollar increase and of the financial markets fall. A recession is considered more than likely in 2023 without being sure that it brings back the prices increase at a level considered as acceptable by the central bank. The investment programs aimed at making the country less dependent from China or at launching the energy transition wouldn’t be enough to dispel the household worries about unemployment increase and the enterprises ones hurt by the internal demand reduction and the increase of the credit costs.
The situation is worse in Europe which imports its fossil fuels. In the United Kingdom, which has very important inflation and trade balance deficit, the government has just announced a huge expenditures plan. The worries about its ability to finance it have generated a strong rise of the interest rates and a fall of the pound. The comeback to a heavy crisis as in the Nineties is not anymore ruled out.
Germany is paying a heavy price to its disastrous choices regarding energy, with the abandon of the nuclear and an excessive dependence to Russian natural gas imports. Inflation has reached 10.9% in September when the country had made price stability a dogma and imposed to its European partners strict budget rules, which, atop of that, it is circumventing. The GDP fall in the 2nd half and during 2023 1st quarter is considered as unavoidable.
Italy is the most indebted country in the euro zone. But it benefits, to the opposite of France, of a strong trade surplus. It has just elected a majority of deputies openly euro-sceptics. The uncertainties about the next government intentions have provoked a deepening of the interest rates spreads with its partners. Italy is the third largest economy in the euro zone. A confidence crisis would have much heavier consequences than the one which had been caused by Ireland and Greece.
France situation is not more reassuring. Its economic results are better than these of its partners, if we set aside the huge trade deficit, partly offset by the services surplus. Inflation (6%) is by large inferior to the euro zone average (10%). Growth and unemployment seem to be less affected than in the other countries. In the other hand, the social climate could strongly degrade during autumn and put into difficulties the government which does not have the benefit of an absolute majority at the National Assembly.
Such is the international environment which the Chinese economy is confronted with. The repercussions on the currencies market have been brutal. The pound and the yen fell by more than 20% against the dollar and the euro 17%, since the beginning of the year. The Chinese currency has all the same remained stable against the euro. Its internationalization is slowly progressing, even if the Yuan has overpassed the Yen as a reserve currency. The current accounts surpluses are accumulating thanks to the record surplus of the foreign trades and the Chinese central bank, being the first one by its amounts of dollars in its currency reserves, indirectly contributes to finance the foreign deficit of the U.S., despite the aggravation of the political tensions between the two countries.
Growth has strongly slowed during the 2nd quarter (+0.4%) and the objective for the year which had been put at around 5% will be impossible to reach. The forecasters consensus fixes it around 3% with an equivalent figure for 2023.To the difference of Europe, this slowing is not linked to the consequences of the war in Ukraine but to the very tough policy of fighting against the Covid-19 pandemic which is still present. Through the lockdown of some of the largest cities of the country like Shanghai or Shenzhen, which are essential sources of the Chinese growth, Beijing has made the production and the investments of several strategic centers falling. The reorientation of oil and natural gas Russian exports toward Asia has allowed to keeping the energy prices and to limiting inflation which remains around 2%. The Chinese central bank, in order to support the economy, has adopted, to the opposite of its Western counterparts an accommodative policy with the diminution of its interest rates and of the level of the bank reserves requirements.
A new supporting plan in favor of the real estate sector would help it to go trough the heavy crisis which is hurting it. The reorientation of the economic activity toward the internal market launched for several years allows also the country to be less dependent of the international conjuncture. Household consumption share in the GDP has passed from 56% in 2014 to 65% in 2021. It has been noticed in August an acceleration of the retail sales year on year by 4.2% against 3.8% in July, which could be the consequence of the softening of the restrictive measures regarding the pandemic.
The American strategy aimed at reducing China influence and recovering its technological independence, as in the semi-conductors, through direct subventions to enterprises and in bringing in imports restrictions, has leaded Beijing to strengthening its economic relations with its Asian partners and with Russia as are testifying of it the recent ASEAN meeting as the conference of the “Shanghai group” which has just been taken in Samarkand. Despite geopolitical tensions, China still believes in the “Kissinger world”, born with the recognition of the country in 1971 by the U.S. and in globalization. Its leaders are rejecting the concept of strategic rivalry to the profit of the development of international investments and of strategic partnership between enterprises.
The current tensions have not impeached Tesla to go through the level of one million cars produced in China and the trade exchanges with the U.S. to grow by 10% since the beginning of the year. The introduction of Porsche on the stock market at a record level of 70 billion dollars is not without link with the success of its models in China which represent near 30% of its registrations in the world.
Chinese growth is slowing but it is much more due to internal factors as the demographic situation than, as in Western countries, the major financial unbalances generated by geopolitical tensions and the fossil fuels prices increase. So, along with the renewal of Xi Jinping mandate, the stake of the coming Communist Party Congress will also be to continue the adaptation of the country economic model to cope with the new critical state of the world economy.