China’s COVID Delta variant outbreak hits already vulnerable economy

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As the economy rebounded in the second half of last year due to extraordinary global demand for its medical equipment and supplies and, subsequently, for consumer goods, it refocused on domestic risks. .

Its debt-to-GDP ratio fell from 255% in 2019 to around 280%, which probably underestimates the ratio considerably, given that Chinese local governments have become masters in the art of increasing “hidden off-budget debt.” “.

The initial waves of the pandemic, coupled with the lingering aftermath of the US-China trade and sanctions wars and the additional layers the Biden administration added to both, caused enormous and continuing disruption in the chains of global supply. The shortage of semiconductors, in particular, is disrupting the production of complex manufactured products, including (but far from exclusively) automobiles.

China’s economic rebound faces a great challenge as it faces an outbreak of Delta.Credit:Bloomberg

As the world’s leading manufacturing base, this has had particularly big impacts on China.

The boom in demand for consumer goods and China’s own stimulus measures have also triggered a boom in demand for commodities.

The prices of raw materials – like oil and gas, coal and iron ore – have skyrocketed. It hasn’t helped Chinese manufacturers that its ban on Australian coal, coinciding with efforts to reduce China’s carbon intensity, has helped drive up the cost of energy.

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Inflation at the factory gate has risen – it rose 9% last month – and is feeding core inflation more broadly, despite the authorities’ efforts to cushion the rise in commodity prices with its threats of action against hoarding and speculation and its outflows of raw materials. of its strategic reserves.

This will impact the profitability and stability of China’s industrial sector even as the authorities’ extraordinary assault on the large end of their tech sector disrupts, destabilizes and destroys wealth in the fastest growing segment of the economy. quick.

The combination of slower growth, rising inflation and instability in businesses and markets is not good in an economy overburdened with debt and with some of its large public and private conglomerates, like Huarong and China Evergrande, tottering under the weight of their respective debts and questionable assets.

When the People’s Bank of China cut bank reserve requirements in July – before the Delta mutation appeared in China, or at least was visible outside China – it raised eyebrows given the rate of growth that was then taking place in the economy. Injecting liquidity into its banking system is usually China’s first response to financial or economic threats.

The obvious conclusion was that either efforts to curb excessive indebtedness could have negative consequences, or the economy was slowing more sharply than the authorities were comfortable, or both. Looking back, the Delta outbreak could have been the other key motivation.

Just as there is no likelihood that a post-pandemic future will look like its pre-pandemic anytime soon, economies are going to be continually disrupted to varying degrees – as Australians can attest – by the evolution of the pandemic.

The authorities are likely to relegate debt and inflation to the background in response to the economic slowdown. Social stability has always been their priority.

More reductions in reserve requirements and interest rates and, perhaps, targeted fiscal stimulus could be on the agenda for the rest of the year as they try to put a floor below the bottom line. ‘economy that allows them to achieve the GDP of more than 6 percent growth rate that they have targeted for the post-pandemic environment.

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While some of China’s challenges are unique to China (because, despite its growth, it is still in a development phase and because of the levels of state intervention and control), the impact of Coronavirus mutations is one that every economy is going to have to deal with for the foreseeable future.

Just as there is no likelihood that a post-pandemic future will look like its pre-pandemic anytime soon, economies are going to be continually disrupted to varying degrees – as Australians can attest – by the evolution of the pandemic.

China is ready to implement measures that most Western countries would not consider to bring the coronavirus under control and its government plays a much more important and central role in its economy than it does in the West.

How the world’s second-largest economy and Australia’s largest trading partner is faring in the face of the Delta epidemic and the threat to its people, growth and stability may not only be of great interest, but also real consequences for the rest of us.

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