The sustained inflation rates and the ever-mounting evidence of China’s monetary involvement
in triggering Russia’s invasion of Ukraine has left a sour taste in the mouths of investors. Not
to mention, the imposed sanctions on Russia from nearly ever country in the West has
confirmed that diplomatic ties mean nothing and provide no stability. Changing geopolitical
facets in Russia and China means that more and more global investors are leaving, fearing the
worst. But the war isn’t the only reason that investors are choosing to flee the scene.
China’s tactic of increasing their bond return rates proved to be unsuccessful in capturing the
market. To make matters worse, the COVID-19 lockdowns in about 70 Chinese cities has left
a mark on the economy as well. With production shut down in China’s 13 most prominent
cities, consumer spending is also at an all-time low leading to an economic slowdown of epic
proportions, especially in the property sector. Despite China trying to keep its cards close to its
chest, the tell-tale signs of economic collapse are all there. The People’s Bank of China has
decided to reduce the required reserved ratio to boost lending through commercial banks.
However, at this time easing monetary policy will not benefit an economy that’s in a “liquidity
trap”. The COVID Zero policy also puts a constraint on economic activity further reducing the
benefit of reducing the required reserve ratio. The reality of the economic disaster that is
brought upon by the COVID Zero policy in China, with massive lockdowns for an infection
rate that at this point in time is much lesser than the current infection rate in several European
countries, is probably lost on Beijing as they try out different methods to boost their economy
to no avail. While other countries are tightening their grips on monetary policies in coordination
with the US Federal Reserve increasing their interest rates, China’s central bank does the
complete opposite, scaring the very investors that they hoped to attract.
A few days prior, the International Monetary Fund (IMF) slashed China’s growth forecast for
this year. IMF’s estimated GDP growth for China now been reduced to 4.4% from 4.8%
signalling the worsening condition of their economy. Investors the earlier found a steady buck
by investing in China are now witnessing the downturn of the same, exposing the liabilities of
the local government, weak structures, debt, and a banking system as fragile as a house of
cards. With the poker face slipping, China must be finding it hard to remain focussed on the
target GDP growth of 5.5% but maintains a poker face as this year is of political significance
to them. In this year, it is impossible for them to admit defeat on either front – whether it be
their economy or the Zero-COVID policy. At the same time, US lawmakers are now refusing
to turn a blind eye to US listed Chinese firms’ bookkeeping. For about a decade Beijing denied
US regulators any access to the books of US listed Chinese firms and they had been functioning
in a state of limbo, however, last week, US lawmakers demanded an end to this which affected
261 companies and would wipe off $1.4 trillion worth of Chinese stock off the American
exchange if Beijing doesn’t cooperate.
Even though China feels that they may be able to sustain this prolonged economic slowdown
and “bounce-back” just as they had in 2020, the global repercussions of China’s slow economy
are substantial. Kristaline Geogieva, the Managing Director at IMF, said that China still has
time and room to adjust their policies accordingly as it is essential for them to counter their
economic slowdown for global recovery. She mentioned that China should focus policy
development on vulnerable households to boost consumer consumption, and develop strong
policies in the property sector, which would further impact their climate goals as well.
However, Xi Jinping opted to continue his façade by stating that China’s economy was resilient
and that there has been no change to long-term trends yet.
In political terms, it is essential for China to have a long hard look at state of affairs everywhere
in the world instead of functioning on an assumption of an economic bounce-back. Geopolitical
tensions are also bound to trip up China’s economy as tensions are flared in the Taiwan Strait
as well. US President Joe Biden will be hosting a summit with Southeast Asian nations in May
where the focus might be on the building Ukraine-like crisis between Taiwan and China.
Ultimately, all of China’s shady activities around the globe and their inconsiderate economic
activity within their own country, their refusal to accept suggestions from world renown experts
may all lead to their impending economic collapse, it has spooked investors already. But
whether China will slip into an economic collapse eventually affecting the world or whether
they will bounce back will only be known in due time.