The Chinese economy was one of the best spared in the world during the economic collapse caused by the pandemic in 2020 with growth of 2.3 percent.
Despite being the global epicenter of the pandemic, the authorities adopted massive economic stimulus measures to compensate for the almost total restrictions on mobility implemented to contain the wave of infections.
China was the first economy to go into lockdown but it was also the first to come out, at the time. In 2021, the stimulus continued to do its job and the Chinese economy grew 8.1%, its fastest pace in a decade.
It is worth remembering that China had average annual growth of over 10% during the decade since its incorporation into the World Trade Organization (WTO) in 2003.
In that decade, its economic model was mainly based on export manufacturing based on cheap labor. That model gradually began to run out from 2012 when China reached its peak in global market share as a global manufacturing hub for low-sophistication products.
From there, the government accelerated an alternate engine of growth that had been developing for years, investment in infrastructure.
However, by the end of the last decade this model, based on public investment, was already showing positive but declining returns. However, China had also been planning a new stage of growth, less accelerated, driven mainly by domestic consumption.
This is how we arrive at a 2022 in which China faces a perfect storm. On the one hand, there are circumstantial factors such as the new confinement measures that have been implemented in the face of the slightest outbreak of Covid as a consequence of the Covid-Zero health policy. This has been done because there is still a very significant percentage of the population over 60 years of age that has not been vaccinated and because the vaccines applied in China, according to some experts, have lower rates of effectiveness.
These measures have temporarily paralyzed some towns and sometimes entire cities. Although this factor has an important weight, it is temporary.
There are two other factors that are rather fundamental that weigh more in the long term. The first is the phenomenon of deglobalization. The share of international trade as a percentage of global GDP began to decline after the 2008-09 crisis, but the trend accelerated with phenomena such as the arrival of Donald Trump to the presidency and Brexit.
The second phenomenon is that of nearshoring, since companies are now more focused on having reliable and close supply chains, even if they have to pay a premium for this. China is perhaps the main victim of this phenomenon as its trading partners perceive it as a less reliable supplier.
The third factor is the growing regulatory risk in the face of an increasingly hostile attitude of the government towards the private sector in sub-sectors such as banking, technology, education and real estate.
If we add to this the strong increase in the prices of energy raw materials, of which China is a major importer, we are facing a scenario of greater economic slowdown.
Although the government maintains an official goal of economic growth of 5.5% for this 2022, some specialists expect growth to be below 4 percent. For now, it seems that the Chinese government is willing to pay the cost of lower growth in exchange for greater regulatory and sanitary control.
Managing Partner of EP Capital, SC
Without Borders
Joaquín López-Dóriga Ostolaza is Managing Partner of EP Capital, SC, a consultancy specialized in mergers and acquisitions founded in 2009.
He is a graduate of the Bachelor of Economics from the Universidad Iberoamericana, where he graduated with honors and the highest average of his generation. He has a Master’s degree in Economics from the London School of Economics, where he was awarded the British Council Chevening Scholarship Award.