As we found out during the pandemic supply chain shock, what starts in China doesn't stay in China any more. The current unrest caused by Covid lockdowns is challenging the country’s leadership at a time when those decades of breakneck economic expansion are at an end.
The world’s second largest economy is facing a ‘polycrisis’ all of its own making – protesting workers, Covid, a prolonged real estate crisis, and the realisation that its export and investment-driven model is no longer a path to sustainable growth. It is barred from accessing US high technology and now even Europe is turning its nose up at Chinese investment.
For many people, China is still all about producing the goods we consume, so the protests have been framed in terms of whether you will be able to get that €1,339 iPhone 14 Pro for Christmas.
But it is far more than that. The 40 years from 1979 in which annual economic growth has averaged 9.5pc transformed it from a backwater into a superpower where its increasingly wealthy citizens now buy 40pc of the world’s new cars – twice as many as Americans – and a quarter of all smartphones.
As recently as the year 2000, China’s output was just 4pc of world’s total and now that figure stands at around 18pc. In the 2000s, it was responsible for a tenth of global growth and now that figure is around a third, thanks to the increased heft of its economy.
However, because China’s gross domestic product (GDP) statistics are a political statement rather than a measure of economic reality, and have become even less trustworthy since 2010, it is hard to estimate its impact on the wider world.
Studies suggest that each percentage-point decline in Chinese growth knocks close to 0.2 percentage points directly off world output. If the spillovers from foreign trade are included then the impact is 0.3 percentage points, according to Yale University China expert Stephen Roach.
To put China’s recent performance in perspective, had annual real GDP growth remained on its former trajectory rather than slowing by nearly 3.5 percentage points since 2012, its economy today would be a just over 40pc larger, Roach noted recently.
So much for Beijing reaping the rewards in the ‘Chinese Century’, the country’s growing economic heft would be matched by greater diplomatic power. After all China had ‘proved’ the superiority of its model when it breezed through the financial crisis, priming the pumps with €520bn of state spending.
Now it feels as if it may turn out to be a very different Chinese century.
The latest Covid outbreak is the largest since the initial Wuhan infections in February 2020
It is only just over a month since President Xi Jinping won an unprecedented third term in office and declared at the Communist Party congress: “The rejuvenation of the Chinese nation is now on an irreversible historical course.”
It is a nation though that faces great questions. The latest Covid outbreak is the largest since the initial Wuhan infections in February 2020 and the country has spent almost three years under lockdown while the west is vaccinated and reopened.
It hosted the Winter Olympics nine months ago in an eerie lockdown and now looks on as Qatar hosts a World Cup where crowds mingle freely. Xi himself is a massive football fan.
China may now face a choice between locking down even harder or just abandoning zero-Covid.
Those Covid restrictions are taking a toll on the economy. The official target says China’s economy is expected to grow 5.5pc this year, but even the International Monetary Fund has marked it down to 3.2pc, its second-lowest level since 1977.
Investment banks reckon that around a quarter of China’s economic output comes from areas that are under Covid restrictions and if these continue, growth could be as slow as 2pc.
The Foxconn iPhone plant in Zhengzhou city that saw wage and Covid clashes last week typically employs 200,000 people, according to Reuters.
The plant was one of those that adopted a “closed loop” arrangement whereby workers are isolated from the public and could continue to work and produce goods.
Protesters in Beijing shout slogans during a protest against China's strict Covid restrictions. Photo: Kevin Frayer/Getty Images
While the China we see in the west is one based on those electronics exports, much of the country’s decades of dazzling economic development has come from the property sector which is in severe crisis and has been for over a year.
The public face of the real estate crisis has been Evergrande, once China's top-selling developer which has more than $300bn in liabilities and has defaulted on its overseas debt.
As Ireland knows from bitter experience, a property crisis doesn’t end with a few bankrupt developers, you get system-wide risk spreading through banks, shadow banks, local governments and homebuyers.
The US National Bureau of Economic Research estimates the total share of property in the Chinese economy at 30pc which makes it more dependent than pre-crash Ireland and Spain. Debt to GDP equalled 290pc of GDP at the end of last year – the same as in the US or eurozone
President Xi’s power grab has already sidelined many of China’s entrepreneurs
“China’s growth model is now coming under pressure from evolving demographics, higher prices and rising debt for both households and property developers,” a recent study by France’s Economy Ministry said.
President Xi’s power grab has already sidelined many of China’s entrepreneurs – Alibaba founder Jack Ma has all but disappeared.
Politics has total dominance over the kind of rational policies that delivered economic growth for so long.
One of the side effects of Covid has been the disappearance of jobs for young people. At one stage one-in-five of those under the age of 24 years was unemployed. A further 11.58 million students are set to graduate next year and if the lockdowns continue, many more will join the ranks of the jobless.
So how much does China matter? To a country like Ireland, the impact of direct trade is small, it accounts for less than 8pc of exports.
For the world as a whole, it matters a great deal.
Investment bank UBS is already forecasting 2.1pc growth next year, the weakest global performance outside the financial crisis and Covid since 1993.
Lockdowns already imply that Chinese growth this year will be at least a full percentage point below IMF forecasts and there’s a risk they now persist well into next year.
Buckle up, it’s going to be a rough ride – with Chinese characteristics.
