Why China is losing the economic battle

Taiwan military drills and Communist Party rhetoric can not hide the domestic challenges facing Beijing

Screaming jets overhead and the sound of multiple missile launches have failed to drown out the chorus of discontent about China’s economy.

Amid the turmoil of the Taiwan crisis, Beijing faces far greater chaos at home as consumer spending dries up to a trickle.

Even last month’s record-breaking trade surplus of more than US$101 billion can not hide the structural weakness inside the world’s second-largest economy.

Exports jumped by 18% in July compared to the same period a year earlier as supply lines started to untangle despite flash Covid-19 lockdowns.

Yet this was offset by an anemic 2.3% rise in imports as Chinese shoppers cut back on big-ticket items amid rising unemployment, a property meltdown, and an expanding debt quagmire.

Then there is the balance of payments problem.

“China is in trouble. Away from Taiwan headlines, capital outflows are now as big as in the RMB [yuan] devaluation scare of 2015/6,” Robin Brooks, the chief economist at the Institute of International Finance in Washington, tweeted.

“That’s due to the strong dollar, which drove outflows in 2015/6, and foreign investors looking at China in a new light after Russia’s invasion of Ukraine,” he said at the weekend.

Balance of payments
E&O = errors and omissions. Graphic: Twitter

State of the nation:

What was said: “Beware the July rebound narrative,” Leland Miller, the chief executive of research consultancy China Beige Book, tweeted.

Delve deeper: “Markets are convinced that easing lockdowns means the worst is over, but July data show that firms are still largely refusing to invest, borrow &, esp[ecially] now, hire,” Miller pointed out.

Big picture: A Washington hearing last week involving the US-China Economic and Security Review Commission has “questioned the veracity of” Beijing’s “data about its economy and Covid-19.”

Reaction to the news: “Are there any legitimate China watchers who don’t,” China Beige Book asked in a tweet.

China Factor comment: President Xi is not only to blame for the military storm in the Taiwan Strait. He has also created an economic maelstrom.