China is pushing us into recession - Economic Policy

China is pushing us into recession – Economic Policy

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China has put itself in a difficult economic position by persisting in its “zero covid” policy. And the whole world pays a high price for this Chinese pride. This new tightening of supply chains could be a blow for the euro zone, which is trying to avoid a recession. “We don’t realize what is happening to us,” said Tom Wenseleers, a biostatistician at KU Leuven.

“I don’t understand China anymore. Even a child can realize that the ‘zero covid’ policy is no longer viable.” “China is not an island. If the rest of the world has chosen vaccination as the way out of the pandemic, China must follow. And if you expected a compulsory vaccination policy from a regime, then it cannot what to come from China, right?

“I don’t understand China anymore. Even a child can realize that the ‘zero covid’ policy is no longer viable.” “China is not an island. If the rest of the world has chosen vaccination as the way out of the pandemic, China must follow. And if you expected a compulsory vaccination policy from a regime, then it cannot what’s to come from China, right?” However, from the start, China adopted a strategy of testing, travel restrictions and quarantines to rigorously suppress covid-19 outbreaks. This strategy has been successful for a long time. Although experts question official Chinese statistics, infection and death rates in China were not as high as in the rest of the world. The economic damage has also been limited, certainly in comparison with the slump in the West. China’s economy is now more than 10% larger than it was at the start of the pandemic in 2020, while the eurozone economy is barely recovering from this shock. But politics of “zero covid” is currently outdated. The new variants of the coronavirus are more contagious, the vaccination coverage in China is low, in particular among the elderly population which is the most vulnerable. The quality of Chinese vaccines is below Western standards and there is no herd immunity from previous infections. “If you let the virus circulate in China, you risk millions of deaths. The country is therefore condemned to severe confinements for a long time. Even if the number of infections, for example in Shanghai, is again under control, this balance will never be stable. As soon as the confinement is lifted, the number of infections will increase again”, explains Tom Wenseleers. “The only lasting solution is to follow the Western example. This means vaccinating the population en masse with vaccines from Pfizer or Moderna. Australia and New Zealand have also opted, initially, for a policy of ” zero covid”, but when this approach became untenable, they opted for the vaccination strategy.” Xi Jinping’s China persists in this strategy for now. “The party has made the ‘zero covid’ policy a showcase building on its initial success. To back down now would be to lose face,” says Filip Abraham, professor of international economics at KU Leuven. Many observers certainly do not expect a change of course before the party congress in the fall, which is to nominate Xi Jinping for a third term as the absolute leader of the People’s Republic. A recession in China cannot be excludedEconomic damage accumulates. A confinement of several weeks in a metropolis like Shanghai is hitting the economy hard. In Beijing and other cities as well, the population, that is, consumers and workers, may be stuck for a long time to come. Production is running out of steam because the supply chains are no longer supplied. Consumption is under pressure as families are not allowed to leave their apartments. Economic indicators do not lie. Manufacturing confidence fell sharply in April, to levels that suggest a contraction in output. Entrepreneurs still believe covid-19 will be brought under control, but they fear the battle will drag on, polls show. China’s service sector tells the same story. Its activity has fallen to levels only seen in February 2020. But business leaders are keeping their cool, believing consumption will pick up quickly once restrictions are lifted. This is an optimistic assessment of the situation, because without a solid vaccination strategy, the lockdowns will repeat themselves in a never-ending story.Officially, the government is sticking to its 5.5% growth target for this year, but the International Monetary Fund (IMF) has already cut its growth forecast for China to 4.4%. Worse, some economists do not rule out a recession, with two consecutive quarters of negative growth. This would be particularly challenging, because China has only experienced one quarter of negative growth since 1993. However, a recession cannot be ruled out, because even without a new form of change, the Chinese economy is not in great form. The real estate market, a key driver of growth, is still suffering from the bursting of its bubble. Chinese tech companies are still not recovering from the reshuffle imposed on them by the government. And China is not immune to high energy and commodity prices that eat away at consumers’ purchasing power and weigh on corporate profit margins. . China is trying to avoid a slowdown in its economic growth with new infrastructure projects, even if it then reverts to the old model of growth, which the Party itself has called unsustainable. The Chinese currency has depreciated too quickly in recent weeks to also be able to digest an interest rate cut. The weakness in the exchange rate suggests that traders also believe that China has put itself in a tricky position for a long time. Consequences for usWhen China, the world’s largest factory, catches a cold, the rest of the world sneezes. For the euro zone, this could mean the difference between a sharp slowdown in growth and a real recession. The Eurozone is already stretched thin by high inflation and the shock of the war in Ukraine. The slowdown in Chinese demand mainly affects countries that export to that country. This includes many Asian countries, but also in the euro zone Germany, and therefore Belgium, as a supplier to Germany. In addition, China is putting new pressure on supply chains, driving up costs for businesses. But a slowdown in Chinese growth also has a silver lining, as lower demand in China could lead to falling commodity prices, although analysts fear that more expensive logistics may ultimately be the deciding factor. . “The new Chinese economic shock means that central banks will have to intervene more to control inflation. The risk of recession is greater than a few weeks ago. All institutions are adjusting their growth forecasts. This downward trend in says a lot more than the forecast itself,” says Filip Abraham. Lockdowns and travel restrictions imposed by China are having a huge impact on supply chains around the world. Port of Shanghai terminals are operating at 50% capacity. More than 300 ships in the world’s largest container port are delayed or blocked. Ships are also anchored in other Chinese ports awaiting processing. There are also other supply issues, as many truck drivers are forced to stay at home or the terminals are not full due to a lack of manpower. “It’s really too much crazy to be said. We don’t quite realize what lies ahead yet,” says Robert Boute, professor of logistics at Vlerick Business School. “Twenty percent of all containers in the world are stuck in traffic jams in front of Chinese ports. There will again be a major shortage of containers, which will lead to a substantial increase in prices, in addition to an increase in the cost of fuel The logistics sector no longer knows where to head The combination of the war in Ukraine, new lockdowns in China and high energy costs is creating a new storm for logistics 2022 will be even more difficult than 2021 and 2020 “The recent recovery of supply chains, evidenced by shrinking delivery times, has given way to new stress, longer wait times and shortages of everything. “I fear a ‘snowball’ effect. When companies realize that shortages are looming again, they will order more than they need, which will put even more pressure on supply chains,” explains Robert Boute. “For many companies, this is the straw that breaks the camel’s back. I see more and more companies producing or buying locally, and working on alternative supply lines. This is not not a luxury, because the problem will not be solved in a few months.” We will therefore also pay a heavy price for this Chinese pride, from which we will be able to draw the necessary lessons. Filip Abraham: “In the past, we have benefited from cheap production in China. We are currently experiencing the other side of the coin. The lesson we are learning is that you cannot become too dependent on one or more a limited number of suppliers. We have now learned the same lesson for our energy supply. Of course, it is not easy to diversify supply chains, but many companies have started to do so. China remains a interesting place to do business, but it is no longer the preferred place of production as it once was, due to the now higher Chinese wages, geo-strategic considerations and the recent experience of the pandemic.” 20% of the world’s containers are waiting in Chinese ports.

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