D-word has come back to haunt crisis China

Trading partners in the US and EU plan to diversify supply networks away from the world’s second-largest economy

For those of a squeamish economic nature, you might want to look away now.

Speaking in Poland, World Bank President David Malpass raised the inflammatory D-word when painting a gloomy picture of China’s economy.

Concerns have been growing about a slow decoupling from the intricate supply chains of the world’s second-largest economy.

The United States, the European Union and other major partners have shown signs of anxiety about their over-dependence on China’s manufacturing network.

“[It is] probably good for everyone,” Malpass said at the Warsaw School of Economics on April 12 in response to suggestions they could diversify their supply lines. 

Trade tensions have escalated between Beijing and Washington during the past five years.

At the same time, skepticism has increased over China’s business practices and its disregard for the rules-based order.

“I don’t know that that will happen,” Malpass said after being asked if President Xi Jinping’s government should remain part of a value-based global trading system shared by other nations.

Reality check:

Such restrictions now cover most major cities [in China].

Ernan Cui, a consumer analyst at the research group Gavekal Dragonomics

Delve deeper: But Shanghai is not the only metropolis suffering. “Other cities around the country are also imposing restrictions on activity and mobility in [the] hope of keeping Covid under control and avoiding Shanghai’s fate,” Ernan Cui, a consumer analyst at the research group Gavekal Dragonomics in Beijing, wrote last week.

What does that mean: “Such restrictions now cover most major cities, and the high political priority of containing Covid means they will not be quickly relaxed,” Cui said.  

Economic fallout: “They’re having setbacks, major setbacks in various areas, and the forecasts for [China’s] growth have been brought down,” World Bank President Malpass said.

Big picture: Communist Party officials are now “scrambling to reverse a slowdown in growth, made worse by surging global oil prices, the war in Ukraine and Covid lockdowns,” The New York Times stressed in its morning briefing newsletter on April 13.

Caught in a dilemma: “The Party’s overriding priority of delivering growth makes it difficult to enact changes that could address deep-rooted problems with its economic model,” the NYT said.

Debt mountain: “Borrowing for infrastructure projects loaded the country with trillions of dollars in debt, and efforts to rein in real-estate speculation have led to debt defaults by huge developers like Evergrande,” The New York Times added.

China Factor comment: We have been pointing out the stress fractures in China’s state-run economy for more than a year. But now those fractures have become cavernous cracks.

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