How rising US interest rates will challenge the Chinese economy

A sharp about-face by President Xi Jinping suggests China is in crisis mode as rising interest rates pose a serious threat to its economy.

In the years leading up to the pandemic, Chinese President Xi Jinping warned that the global economy was facing challenges and that a Black Swan event posed a serious risk to the Chinese economy and the world.

Since the start of the pandemic, the People’s Bank of China, financial regulators and senior Chinese Communist Party leaders have further intensified their calls for consideration of systemic risk, as growing concerns about developments in global financial markets have were expressed last year.

But in recent months, the mood has changed considerably.

President Xi’s U-turn

In a virtual address atop the agenda of the World Economic Forum in Davos in mid-January, President Xi sent a very clear message to the US Federal Reserve and its Chairman, Jerome Powell: Please, don’t raise interest rates.

“If major economies slow down or reverse course in their monetary policies, there would be serious negative fallout. They would present challenges to global economic and financial stability, and developing countries would bear the brunt,” Xi said. .

With US inflation currently running at 7% a year and inflation posing a growing risk to post-pandemic economic recovery around the world, Xi’s comments run counter to the intentions of many. growing number of central banks, including the US Federal Reserve.

Growing risks in China

Although we can only speculate on the reasons for the change in the narrative coming out of Beijing, it is clear that risks are developing within the Chinese economy.

The Chinese government’s crackdown on the riskiest elements of its real estate sector has had a major impact on the industry, demand for materials and the economy in general.

According to a recent report by investment bank UBS, housing starts were down 31% year-on-year in December.

With the real estate sector and associated industries accounting for nearly a third of China’s GDP, there are growing fears that problems within the industry could cause a broader slowdown in the economy.

As risks continue to accumulate and growth in the consumer-driven elements of the economy deteriorates, this has created a rather ironic and, in some ways, contradictory set of circumstances.

One foot on the accelerator, one foot on the brake

Despite the economic difficulties that the Chinese government’s much-needed attempts to rein in risks in the real estate sector have created, they have so far refused to significantly alter course.

However, with so much of China’s economic fortune in the real estate sector, the Chinese government had only a simple choice, accept much weaker growth figures or find another engine of economic expansion.

Given the vastness of the Chinese economy and the practical impossibility of replacing real estate-led growth with sufficient domestic consumption in the short term, Beijing has been left with a very familiar option that it has largely previously used, the construction of infrastructures.

This is a further departure from the course set by Beijing.

Under the leadership of President Xi’s predecessor, former President Hu Jintao, Hu Jintao reiterated the need for China to rebalance its economy away from capital investment and construction towards a more market-driven growth model. consumer.

Even in the middle of last year, the Chinese government halted work on two high-speed rail projects worth 130 billion yuan ($29 billion), due to concerns over rising debt. local governments.

Now that risks within the global economy continue to pile up and the true extent of China’s economic slowdown is becoming clear, Beijing is not just putting its foot back on the accelerator of infrastructure construction. , he puts his foot to the floor.

In megalopolis Shanghai, a full year of infrastructure and investment bonds will be issued by the end of June.

For the 2022 calendar year, Beijing has allocated a quota of 1.46 trillion yuan ($326 billion) in local government special bonds, as the country seeks to boost investment in local infrastructure and steady economic growth.

Local governments recently issued 190 billion yuan ($42 billion) worth of bonds in just one week, according to a report by Yuan Talks, a Chinese economy- and market-focused media outlet.

The course of Chinese monetary policy has also changed significantly in recent days, with the People’s Bank of China (PBOC) cutting the benchmark one-year lending rate twice in as many months for the first time in a short time. after the start of the pandemic.

Australia’s Fortune

In recent years it has been said that Australia’s economic fortunes rest on a bulk carrier and with up to half of all exports going to China, the Middle Kingdom’s economic fortunes have certainly come to define ours.

The trillion-dollar question that could define Australia’s economic fortunes in 2022 could be this: Can Chinese infrastructure building fill the inevitable hole that will be left by the real estate sector if Beijing continues on its path? current?

With Omicron still a major factor affecting the Chinese economy significantly and the IMF warning of a slowing global economy, the outlook is bleak at best.

As the Chinese government’s strategy continues to evolve, they no doubt have their finger on the panic button. They have already cut interest rates and flouted caution in increasing local government debt. New measures to stimulate growth may require an even greater degree of action.

Ultimately, if the US Federal Reserve raises interest rates in March as markets expect, against President Xi’s advice, China could face tough economic dilemmas in 2022.

Tarric Brooker is a freelance journalist and social commentator | @AvidCommentator

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