Growth at a Standstill in China – 1 Good and 1 Bad News for the World Economy.

The situation is more worrying than ever for Xi Jinping a few months before the CCP Congress.

As the 20th National Congress of the Chinese Communist Party looms at the end of the year for Xi Jinping, China is facing an unprecedented situation: a brutal slowdown in growth. The Zero-COVID policy implemented by Xi Jinping for 28 months has brought the world's second-largest economy to a standstill.

Stuck in the strategy that he put forward at the beginning of the COVID-19 pandemic to show the world the superiority of the Chinese model over that of the West, Xi Jinping is looking for a way out of the crisis.

The fact that growth in China has come to a halt is all the more worrying because China has been the engine of global growth for the last 20 years. China has contributed 25% of global growth over the period. Quite simply, the Chinese economy has grown 79 out of 80 quarters over the last two decades.

But in recent weeks, China's brilliant machine has stalled. Retail sales, for example, have collapsed by 11% in one year. And for the first time since 1990, China's growth may be lower than America's.

A real revolution!

Of course, the Zero-COVID policy and the confinement that affected more than 200 million people in the country's main cities played a major role in this sudden stop of growth. However, this is not the only reason.

Before that, Xi Jinping had launched a campaign for more equal prosperity. He had attacked entire sectors of the economy. By destroying some parts of the economy, such as private education, by reducing others, such as video games, or by attacking big companies whose managers had taken some liberties with the central power.

Everyone remembers the disappearance of Jack Ma for several weeks after criticism of the CCP.

The situation is so worrying for the CCP in China that Chinese Premier Li Keqiang launched a real alarm call at the end of May 2022 about the state of the Chinese economy. He called on the 100,000 officials watching his video conference to stimulate growth and reduce unemployment.

Despite these somewhat desperate calls, no concrete action has been taken.

China refuses to engage in the kind of overreach that Western governments and central banks did during the COVID-19 crisis. The Chinese government is waiting for the confinements to end and is betting on a powerful rebound of the economy fueled by the catching up of household consumption and corporate investments.

This is where a rather incredible paradox appears.

Liberal economies were transformed into interventionist state economies with the COVID-19 crisis. And it is a communist, centralized, and interventionist power that prefers to let the economy regulate itself without trying to change its course.

China is betting here on a V-shaped recovery as soon as the restrictions are fully lifted. This will be a fascinating experiment to watch.

Final Thoughts

This sudden slowdown of the Chinese economy can be seen from two angles for the world economy. There is indeed good and bad news here.

The good news is that this slowdown will ease Chinese demand for commodities, especially energy, and avoid additional upward pressure on inflation. With an overheated inflationary world, we don't need another China running at full speed.

The bad news is that this slowdown will contribute to maintaining bottlenecks and delay the normalization of international trade channels. So we'll have to be patient on that front.

Optimists will linger on the good news, while pessimists will linger on the bad news. It's up to you to decide which side you want to be on.