Mon. May 23rd, 2022
Cartoon courtesy of Financial Times

According to international media, China’s virus outbreaks signal economic plunge while the US and EU economies have proved resilient. However, the data tell a different story of inflation, commodity crises and misguided wars in the West.

In the West, international media have portrayed China’s Omicron outbreaks as a game changer that reflects the mainland’s fall. So, will the pressures on China cause the proposed outflow of foreign multinationals as some have suggested? The answer is no.

In 2021, China’s actual use of foreign direct investment (FDI) exceeded $173 billion, up 20.2 percent year on year in dollar terms. In the first two months of this year, FDI inflow soared to $37.9 billion in dollar terms, an increase of 45.2 percent year on year.

Since early March, the Omicron outbreaks have spread from Shanghai to other parts of China, including Beijing, and Guangdong and Hunan provinces. So, how does China’s pandemic performance compare with that of other countries?

Media coverage vs actual realities

When China largely contained the Covid-19 outbreak in early 2020, the number of confirmed cases was about 3 million worldwide. After two years of the pandemic, the global figure is 516 million. In the US alone, the confirmed cases exceed 84 million, although the real figure is much higher. According to the US Centers for Disease Control and Prevention, some 60 percent of Americans have been infected by the virus.

The failure of Washington and Brussels to contain the pandemic, coupled with inadequate international cooperation and rich countries’ vaccine hoarding, has given rise to waves of new variants. The common denominator of these recent crises is the end of the lockdowns, opening up of the economies and increasing international travel.

China is no exception, but it has a track record of fast response and economic rebound.

Here are the facts:

Adjusted to the size of population, the most affected countries are topped by small and open trading economies such as Denmark (5th) and the Netherlands (9th); major economies, including France (14th), the United Kingdom (38th) and the United States (57th). The numbers are lower for Japan (129th) and developing countries such as the Philippines (146th) and India (150th).

FIGURE 1 CUMULATIVE CONFIRMED COVID-19 CASES PER MILLION PEOPLE

Source: Johns Hopkins University CSSE Covid-19 Data, May 7, 2022.

But China (223rd) is at the low end of the list. It has 152 cases per 1 million people, relative to 249,700 cases in the US (Figure 1).

In light of these realities, the argument that the magnitude of the Omicron outbreaks in China exceed the pandemic devastation in the West is thoroughly flawed.

Devastating headwinds

The counter-argument is that China occupies such a vital position in international value networks that severe disruptions in Shanghai, Beijing and Guangdong will have global repercussions. That is, of course, true, but it is also true about foreign multinationals headquartered in the US, European countries and Japan, which have suffered painful disruptions during the pandemics.

Obviously, rolling lockdowns in China’s economic hubs pose new challenges, including delayed recovery in the auto sector and increasing headwinds in the electronics sector. The slowdown is already discernible in the sharp fall in the purchasing managers’ index for March, coupled with weak import growth.

The impact of global supply chain pressures is high in China due to the country’s key role in global supply and distribution. Yet, other economies will encounter even stronger headwinds over time. The US Fed recently increased the interest rate by 0.50 percent, the biggest hike in 22 years. Since the Bank of England is likely to follow in the Fed’s footprints, pressure will increase on the European Central Bank to launch its rate plan.

In the developed West, new headwinds will result in downgrades across most major economies. In the US, the Biden administration, whose approval ratings have plunged from 53 to 38 percent, is struggling with the highest inflation in 40 years, record trade deficit, depressed growth and first-quarter contraction. In the EU, the recession risks loom even higher. Inflation and rate hikes are penalizing growth in the US and Europe (Figure 2).

In Japan, growth forecasts have been sharply cut. China, too, must tackle the new headwinds, but its starting point — higher growth (4.8 percent in the first quarter, lower inflation of 1.5 percent) — is more favorable.

In contrast to most developed economies, China seeks to alleviate sharp slowdown via moderate easing. Recently, the People’s Bank of China (PBoC) cut the required reserve ratio (RRR) by 25 basis points, less than the markets expected. However, the PBoC is likely to engage in further quantitative easing, including more RRR cuts.

Global headwinds have only begun

Since March, the global economy has moved into a new, more perilous status quo with rapidly rising adverse economic repercussions. As a result, global growth is projected to plunge to 3.3 percent over the medium term, according to the International Monetary Fund. But that’s a (very) benign scenario.

In addition to the aggressive rate hikes by the Fed and central banks of other rich economies, the coming shocks will be compounded by the protracted Ukraine crisis, ill-advised economic sanctions and rearmament drives which could prolong, even widen the conflict. Moreover, global prospects will continue to be penalized by energy and agricultural crises, lack of proactive diplomacy, new virus variants and corrosive stagflation.

Without a broad reset of policies in the West, the current vicious circles will only broaden and deepen. And as before, the developing economies will pay the greatest bill.

FIGURE 2 GDP GROWTH AND INFLATION: US AND EURO AREA

Source: Trading economics, Difference Group Ltd.

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