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Is China's economy in the sh-tter?

Xi better fire up the "make China great again" hats.

China’s Economic Struggles

As growth slows, President Xi Jinping may play the nationalism card.

By The Editorial Board, WSJ

July 29, 2022 6:17 pm ET

Beijing is escalating its effort to scuttle a Taiwan visit by House Speaker Nancy Pelosi in the coming days, and the threatening rhetoric from the Communist Party makes more sense when you consider the domestic backdrop. The Chinese economy looks increasingly brittle, so it would no great surprise if President Xi Jinping resorts to nationalist brinkmanship as a distraction.

The basic story is slowing economic growth. Beijing has set a GDP growth target of 5.5% in 2022, which is modest by historical standards. Even the Party now seems to admit the country is not going to hit that target, at least not honestly, as growth was only 2.5% in the first half. For an economy of China’s size, with hundreds of millions of citizens still in poverty, this is the functional equivalent of a recession.

Slowing growth is global, but Mr. Xi has added Chinese characteristics. A chronic problem is his “dynamic zero-Covid” policy, which Beijing shows no signs of easing. This imposes sudden lockdowns and stringent testing requirements anywhere Covid-19 is detected. The lockdowns are a severe strain for ordinary Chinese, and a danger to global supply chains passing through China. Foreign companies are rethinking investments, while local firms suffer.

China’s property implosion also continues. A crackdown on property speculation that started in 2020 has become a broader crisis. A growing list of private developers have defaulted on debt or come close, and falling property values are hurting local governments that rely on land sales for revenue.

Groups of would-be homebuyers recently staged a mortgage strike, refusing to repay loans for apartments that failing developers haven’t completed. The government quickly cracked down on the protests.

Far more worrying is the plight of the small-business suppliers to failed developers. These creditors hold large quantities of commercial paper representing money owed for goods and services, and in China’s Wild West financial system those IOUs are frequently exchanged as a form of money. A collapse in confidence here could do serious damage.

Word arrived last weekend that Beijing is considering a property bailout that could reach $44 billion. The money would be funneled through state-owned banks to buy unfinished projects, reports suggest, and the government might then rent out some of the homes rather than selling them.

This would be consistent with speculation that Mr. Xi plans to use the crisis to consolidate the industry in state-owned hands. But it won’t solve the problem that China’s economy remains overburdened by property-related leverage and that households still have too few other outlets for savings and investment.

As for the broader economy, Beijing appears to be planning another public-works spending blowout. Estimates range as high as $1 trillion, much of that financed with government borrowing quotas pulled forward from future years. This might goose GDP for a spell, but at the cost of an even taller and less stable mountain of debt. Note also that most of Mr. Xi’s economic plans pull resources from the productive private economy to expand the reach of the state and state-owned companies—a big threat to future prosperity.

Which brings us back to Speaker Pelosi. China is the world’s second-largest economy and a sick Chinese economy is a geostrategic danger.

Mr. Xi is seeking a third term as the country’s leader at a Party meeting later this year. A weak economy leaves nationalism shaded with militarism as one of his strongest political cards. It’s been said for some time that “managing China’s rise” is the West’s main strategic challenge. But managing China’s economic trouble might be as difficult.

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