Should we be worried about China’s economic slowdown?

The World Bank has lowered its forecast and is now betting on 4.3%, while investment banks are forecasting even weaker growth.

Growth in 2021, which reached 8%, was exceptional, recalls Marc-Antoine Dumont, economist at Desjardins. Last year, Chinese factories operated at full capacity as parts of the world were locked down and demand for goods soared, he said.

" Now it's back to normal. China will not be able to benefit, in 2022, from the same circumstances of 2021. "

The second quarter of 2022 is likely to be particularly painful. Economists forecast negative growth, a consequence of the zero COVID health policy. Several major cities, including Shanghai, have suffered long and very strict confinements which have dealt a severe blow to consumption. Result: retail sales fell by 11% in April, and industrial production by 3%.

An announced decline

However, the slowdown in the Chinese economy is not due exclusively to this particular context, but rather is part of a structural trend, say the experts.

China is an emerging economy trying to transition to a consumer economy, like advanced countries, such as Canada and the United Statessays Marc-Antoine Dumont.

" This is a natural slowdown for the Chinese economy, which is maturing. "

In recent years, China has built a significant amount of infrastructure, such as ports or highways, which has led to efficiency gains for businesses. They were able to increase their exports, which resulted in exceptional GDP growth. However, there is a limit to the number of highways and ports that can be built, and China is reaching that limit.underlines the economist.

Even before COVID-19, Chinese growth was only 6% per year, points out Alicia Garcia-Herrero, researcher at the Bruegel Institute and principal economist for Asia Pacific at the investment bank Natixis, based in Hong Kong. China is never going to grow 8% again; we have to get used to this new realitynotes Ms. Garcia-Herrero.

" It's not punctual for 2022, it's structural. "

Another contributing factor is demographics. The 2020 census revealed faster-than-expected aging, while the birth rate is at an all-time low at 8.52 births per 1,000 people.

China's population is about to start shrinking and the working-age population has already been shrinking for a few yearsnotes Philippe Aguignier, researcher associated with the Asia program of the Institut Montaigne and teacher at the National Institute of Oriental Languages ​​and Civilizations (Inalco), in Paris.

" This is a very important headwind that the Chinese economy will have to face. "

Another issue hampering Chinese growth is the fact that the economy is driven more by investment than by consumption. However, this model is running out of steam, argues Mr. Aguignier. To keep growth rates where you want them to be, you have to invest more and more, he explains. We get into debt, which introduces an element of financial fragility.

The setbacks of real estate developer Evergrande last year illustrated this instability well.

There are quite unfavorable negative elements that have weighed on Chinese economic growth for quite some time, notes Mr. Aguignier. Add to that the economic factors, including China's very particular management of COVID-19, the war in Ukraine, the slowdown in European economies and the increase in the cost of raw materials... The boat is still quite busy.

" The engines that drove the Chinese economy are dying out or, in any case, diminishing in intensity. "

“A extinguisher effect”

Over the past few decades, China's booming economy has driven global growth. Its deceleration will clearly have extinguisher effectargues Mr. Aguignier.

The slowdown will be reflected in particular by a drop in demand for raw materials. Experts therefore expect to see their price decrease.

It's a normalization of the price, not a drop that would be painfulemphasizes Marc-Antoine Dumont.

" Of course, exporting companies prefer prices to be higher, but in the current context, where they are really high, we shouldn't be alarmed. "

As for merchandise exports, a slowdown in Chinese production will compound the supply chain problems we already know. This could lead to longer delivery times and higher prices, thereby contributing to inflation in importing countries.

Finally, as far as foreign direct investment from China is concerned, it has stagnated since the start of the pandemic, confirms Alicia Garcia-Herrero. Emerging countries are likely to suffer the most, since China is often their most important financier.

We can see that it is slowing down, and it does not date from this year, remarks Philippe Aguignier. It's been a year or two already. However, these countries need these flows.

" For developing countries, the threat is greater. "

A new engine

Even if the situation seems gloomy, the Chinese economy could surprise us, according to Marc-Antoine Dumont. China has shown us in the past that it is capable of bouncing back stronglyhe says.

If the pandemic is brought under control and domestic restrictions are fully lifted, annual growth could be higher than expected, argues the World Bank in its most recent update on China.

However, it is certain that global growth can no longer depend on China, notes Alicia Garcia-Herrero. We must look for new engines of growthshe argues, citing the example of India.

" We must not abandon China, but we can no longer pretend that growth comes from it alone. "

In this context, can China still aspire to become the world's leading power?

If the growth differential holds, the Chinese economy will eventually overtake the US economy, observes Ms. Garcia-Herrero. Even if Chinese growth is no longer as strong as in the past, it is still more vigorous than US growth.

However, China will never be much more powerful than the United States, the researcher believes. Around 2030, the growth of the two economies is expected to be similar.

However, China has an advantage: the region where it exerts its influence, Southeast Asia, is much more dynamic and its growth is stronger than that where the United States is the dominant player.