Chinese growth is under pressure from COVID-19 lockdowns, inflationary pressures, depressed trade due to the Russian invasion of Ukraine, and potential secondary sanctions from the United States and allies for its support of Moscow.
The U.S. secretary of the treasury is a position that usually takes a pro-Beijing stance relative to other cabinet members. Yet even the incumbent secretary, Janet Yellen, threatened economic repercussions against China for any Taiwan invasion, and Beijing’s standing in the world for its support of Moscow.
China’s Limited Economic Options
Despite all the risks above, Beijing’s policy options to juice its GDP growth are wanting.
Experts predict Beijing will cut its reserve requirement ratio (RRR) of cash that banks are required to maintain. Such a cut, along with an expected cut in interest rates, could flood the economy with cash, having the goal of accelerated production and growth.
However, China’s economy has few productive opportunities for investment, given oversaturation and COVID lockdowns that are stopping factory production. So this capital release could push investment out of China and increase inflationary pressure.
Meanwhile, investment in Treasurys is increasingly lucrative and relatively low-risk compared to China, as the United States is expected to increase interest rates as a counter to inflation. Thus, Beijing could be pushing cash into the economy just as the United States attracts it.
Beijing might also try to increase infrastructure and property development projects to boost GDP. But China’s economy is already oversaturated with real estate development. Investors now recognize that ghost cities have risen to make GDP growth look robust even as nobody lives in the new housing developments.
As a result of the lack of demand for new housing, China Evergrande and other development companies have defaulted on billions in offshore loans. Some of their distressed debt is now being swapped for equity by state-owned enterprises in order to keep from worse defaults. But these enterprises have little experience in property development. The swaps thus increase the risk of future missteps. The risk is moving from China’s private sector to the regime itself.
Xi Jinping, who is seeking an unprecedented third term as party secretary, must now contend with an impossible choice for his continued leadership: either relent on the COVID lockdowns to improve the prospects of his growth goals, or accept negative real growth in 2022. He is likely to do neither until he secures his third term. This kicks an untenable situation down the road, worsening the long-term economic outcome for China.
“Party Secretary Xi Jinping’s likeliest calculation will be that the easiest solution to the conundrum is to blame COVID-19 for not being able to reach the growth target, keep the [COVID] death rate low with the help of extensive lockdowns, and secure his tenure as party secretary at the 20th party congress. The PRC’s [People’s Republic of China] real growth rate in 2022 could be anything, 0 percent or even negative,” professor Carsten Holz at the Hong Kong University of Science and Technology told Al Jazeera.
Secondary Sanctions on China
Now would be a good time to increase economic sanctions on China and let it fail, given that Xi has violated international trade norms through the theft of hundreds of billions in intellectual property, and dumping of its products on foreign markets to drive out Western and allied competition, not to mention setting himself against the long-held norms of liberty, human rights, and democracy, including in Ukraine.
Beijing is unlikely to improve until China democratizes, so there is no reason to keep supporting it with American and allied trade and investment.
There are immediate reasons to impose sanctions, as observed by Treasury Secretary Yellen, who said publicly that China must help stop Russia’s invasion or be held responsible. The most immediately justifiable sanctions, then, could be secondary sanctions based on Xi’s support of Russian President Vladimir Putin.
In exceedingly diplomatic language, Yellen essentially threatened as much, saying that economic disengagement with China is possible if Beijing fails to help end Russia’s invasion.
Treasury secretaries are typically the most pro-Beijing members of the U.S. president’s cabinet due to over $600 billion in annual U.S.-China trade and approximately $2.3 trillion in U.S. investment in China. So Yellen’s comments hold particular weight, given that the rest of President Joe Biden’s cabinet is probably tougher, but quieter, on China.
“The world’s attitude towards China and its willingness to embrace further economic integration,” Yellen said, “may well be affected by China’s reaction to our call for resolute action on Russia.”
Moscow’s invasion of Ukraine has illustrated the threat of dictatorships to the world in a dramatic fashion. So the world is waking up to the threat of the Beijing regime as well. Let’s hope the international community, including the Biden administration, takes tougher action rather than just relying on tougher words.
Views expressed in this article are the opinions of the author and do not necessarily reflect the views of The Epoch Times.