China's 'economic stalling' threatens push to overtake US as No 1 economy

While China is not only at risk of lagging behind global economic growth in the current quarter, some analysts say it looks to remain under greater pressure than the United States amid growing concerns of a global recession.

While unveiling a new 19-point policy package to add another 1 trillion yuan (US$146 billion) worth of stimulus spending, the State Council, China's cabinet, warned on Wednesday that "marginal fluctuations still remain, and foundation of an economic recovery is not solid" in the country.

That same day, more than 4,300 listings fell in China's stock market. Out of about 4,800. Only 475 rose.

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It also came just one day after a leaked internal memo - by Huawei Technologies' founder - warned of a "painful" decade ahead. The bleak economic outlook was said to have really struck a chord in the country's business and technology sectors.

In the ensuing debate, some have argued that the domestic situation in China is gloomier than it is overseas, noting how a large number of countries maintained robust economic expansion in the year's second quarter, far outpacing that of China.

Hit hard by coronavirus outbreaks and zero-Covid lockdowns, the world's second-largest economy grew by a mere 0.4 per cent last quarter.

Compare that year-on-year economic growth not only to what was seen in developing countries such as Malaysia (8.9 per cent) and Vietnam (7.7 per cent), but also in the developed world, with the European Union and United States posting much rosier year-on-year growth rates.

Subsequently, the reading of China's monthly headline economic indicators in July also disappointed the market.

On average, analysts are now expecting the Chinese economy to grow by 4.8 per cent in the current quarter (July-September), according to Chinese financial data provider Wind. But even such a strong quarter-on-quarter increase would still put China well off its annual GDP growth target of "around 5.5 per cent" that Beijing announced in March.

Given the impact of recent Covid-related restrictions, it was hard for China to fundamentally reverse its comparably backward position in the global ranking of economic growth during the third quarter of this year, according to He Jun, a senior analyst with the independent multinational think tank Anbound.

"China is an emerging economy as well as a production-oriented one; it will be a very dangerous thing if economic growth is even slower than in consumer-oriented developed countries," he said. "On the whole, China should pay close attention to the risk of economic stalling.

"If the economy is not good ... it will be difficult [for China] to compete with some countries in the international arena."

The challenges for the Chinese economy are more internal than external, with a "self-blockade" - resulting largely from Covid containments - being the biggest factor, along with ever-surfacing risks of structural problems such as local government debt and corporate debt, according to He.

He also warned that the drag of the Ukraine war on Europe's economy will impact China's exchanges with its second-largest trading partner, and that the escalating global geopolitical tensions were worsening China's external environment of development.

"The global economy is not optimistic in the next few years, especially in China," he said.

The point was similarly hammered home last week by former US Treasury Secretary Lawrence Summers, who told Bloomberg that it was "now much less clear" whether China will, at some point, overtake the US in terms of total GDP.

Despite such thinking being nigh unquestionable just a year ago, Summers pointed to a number of difficult challenges that China is struggling to overcome, including its dwindling population growth and growing interference in enterprise.

Robin Xing Ziqiang, chief China economist with Morgan Stanley, also noted that the outlook on China's economy was more worrisome.

"The US economy might not suffer any permanent scars, despite a technical recession resulting from the raising of interest rates to combat inflation. Its potential growth rate is expected to remain stable," he said during a recent webinar held by the China Macroeconomy Forum.

"But for the Chinese economy, the top priority is how to get the residential and corporate sectors out of the current predicament without leaving permanent scars that affect long-term growth potential."

Those scars, he said, could include companies being more reluctant to invest while consumers become even less inclined to spend money. And if that intensifies, he warned, China's growth potential would need to be significantly recalculated.

"[That] may also lead to a global reassessment - from politics to business circles - of the trend of 'rising East and falling West'," he said.

This article originally appeared on the South China Morning Post (SCMP).

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