China can no longer be certain of overtaking America

Container ships are queuing to get into the Shanghai ports and the city’s truck traffic this month is less than a fifth of what it was in April 2019. Most of the steel mills along the east coast have halted production. Crop planting has been delayed.

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President Xi Jinping is in a bind. Having demonised those countries who have said the only way out of the pandemic is to live with COVID, how can Beijing now adopt a similar strategy? What’s more, some epidemiologists have predicted an exit wave could kill up to 2 million of China’s still relatively poorly vaccinated population.

But if the authorities double down on the zero-COVID policy they will condemn the country to continued isolation and indefinite curfews that will further hamper the economy.

And time’s running out. Xi is expected to launch his third term as the country’s premier at the five-yearly party congress in the autumn, paving the way for lifelong rule.

A stagnant economy or morgues piled up with body bags are certainly not part of the carefully choreographed script.

China’s economy was already in trouble. Beijing was aiming for growth of just 5.5 per cent in 2022, its lowest in three decades, even before the latest lockdowns. It’s far from clear that this lower target would have been hit even with the usual massaging of official figures.

Half of all business investment in recent years has been related to the property sector, which supported a staggering 25 per cent of China’s GDP, a far higher proportion than in both property obsessed Spain and Ireland before the eurozone crisis. The rapid expansion of China’s real estate sector was powered by a huge migration from the farms to the cities and the availability of cheap credit. The value of a standard Beijing apartment ballooned to 25 times the annual wage.

However, the slow-motion implosion of Evergrande Group, one of China’s biggest real estate developers, and the central bank’s attempts to release some air from the country’s credit bubble, strongly suggest the party is over.

At the same time, the regulatory and political crackdown on the technology sector has scared off investors resulting in the country’s 10 largest tech giants losing about $US1.7 trillion ($2.3 trillion) of their collective market value while cowing China’s “old guard” tech founders like Jack Ma.

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With 100 million consumers in lockdown, retail activity has all but ground to a halt and local governments, which have no power to raise taxes, are no longer selling vast tracts of land to property developers.

Should the slowdown continue, foreign investors, who were prepared to turn a blind eye to human rights abuses and the theft of their intellectual property in return for access to a huge and fast-growing economy, will grow more circumspect. When China accounted for a third of all marginal growth in global demand for luxury vehicles, Western car companies couldn’t afford not to have access. If that were to fall to say, 5 per cent or 10 per cent, they can take it or leave it.

Likewise, those countries that had signed up to the Belt and Road Initiative need only look at the crisis in Sri Lanka – where food and medical shortages, soaring prices, power cuts look likely to lead to a bailout by the International Monetary Fund – to see what happens when developing economies are saddled with unsustainable debt to fund unnecessary infrastructure projects.

Command-and-control is all very well if you get all the big calls right. Messy democratic compromise still works better if you believe that human beings can occasionally make mistakes and might need to change course a few times over the course of a century.

The Telegraph, UK

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