The health of the second largest economy on the planet is keeping half the world on edge. The slowdown in China -its GDP grew 3% in 2022, at the slowest pace in forty years and below what activity advanced globally- has confirmed a crisis that has been brewing in recent quarters due to restrictions due to the pandemic. The ‘zero covid’ policy turned its economy upside down at a particularly delicate moment, in which Beijing had to deal with other difficult-to-manage structural problems: a mammoth debt (approximately 300% of its GDP adding the liabilities of the companies state), the delicate health of its real estate sector, demographic tensions and the trade dispute with the United States and other major economies on the planet.
The prospects for the Asian giant are somewhat better as a result of the reopening, although it seems unlikely that in the shortest term it will recover its role as the engine of global growth in recent decades. This revival, which the Monetary Fund estimates at a 4.4% rise in GDP for the year as a whole, has alerted international organizations such as the International Monetary Fund and the European Central Bank (ECB) itself. The president of the entity, Christine Lagarde, warned this Friday from the Davos Forum about how the Chinese “awakening” will boost its demand for oil and Liquefied Natural Gas (LNG) to levels much higher than those of last year.
The French company believes that the reduction in available capacity after the invasion of Ukraine will imply more restrictions and “more inflationary pressure” for Europe, which competes with Beijing for LNG supplies following the veto on Russian hydrocarbons. The International Energy Agency expects the Asian country to account for nearly half of the expected increase in oil demand this year, for which it predicts record figures of around 101.7 million barrels per day.
The West in general and the Eurozone in particular are battling inflation at historically high levels (9.2% in the region in December) that has forced central banks to step on the accelerator of rate hikes. Lagarde has made it clear that the ECB will continue to support its monetary policy to face it and has called on the governments of the area to focus their fiscal policies. “The fiscal support disbursed in 2022 must be better targeted and must not push those who make monetary policy decisions to do more” or to raise rates more and more, he settled. His fears about the impact that increased Chinese energy demand could have on world prices are shared by IMF Managing Director Kristalina Georgieva.
The best prospects for China
The Lunar New Year starts this Sunday and experts are confident that the economic data will begin to be more favorable from the second quarter. Xi Jinping’s government has made growth a priority in his speech and has hinted that there will be new stimulus measures. From the coupons that will begin to be distributed in May to counteract the sluggishness in consumption, to investments in infrastructure and in the energy transition, especially in solar and wind technologies. China has also focused on increasing its urbanization rate from the current 63 to 80%, considering it an essential engine for growth.
“The latest economic data releases point to a ‘V’-shaped recovery in the second quarter,” said Sean Taylor, Asia Pacific Chief Investment Strategist at DWS. Contrary to what might seem, the 2.9% growth that its GDP increased in the fourth quarter was significantly better than many analysts had anticipated. A faster-than-expected economic reopening at the giant could further ease disruptions to supply chains, say economists at Pimco, the world’s largest fixed-income manager.
The impact of geopolitical tensions
Geopolitics will also play an important role in consolidating or not consolidating these perspectives. The ban imposed by US President Joe Biden on semiconductor exports to China highlights the increasingly tough stance against his main rival. Washington is also pressuring Brussels to stick with its stance towards Beijing. “The multipolar world order is thus witnessing an increase in tensions, dubbed the new cold war,” warns Vincent Chaigneau, director of research at Generali Investments.
Similarly, one of the known risks for 2023 is that China takes blockade measures against Taiwan. The expert highlights how the constant increase in the proportion of the population that feels “only Taiwanese” (and that according to polls would exceed 60%), suggests that time is playing against China. Even more so when the United States plans to allocate 10,000 million dollars to security aid and to accelerate the acquisition of weapons for Taiwan, a measure that will add extra pressure on the Beijing government in the coming months.
