China’s low growth era | FinancialTimes

If the UK hadn’t been an inadvertent “dead cat” attracting market attention lately, we think more people would be panicking about China. Fortunately, BlackRock has us covered.

As China’s 20th Communist Party Conference gets under way, authorities delayed the release of third-quarter GDP data – economists believe annual growth will slow to a new three-decade low of 3.3% – and have clearly drawn 7.2 as a line in the sand for the renminbi-dollar exchange rate.

This could become harder to defend as the era of Chinese hypergrowth draws to a close, according to a blog post published by Larry Fink’s Vanity Project BlackRock’s quasi-think tank, the BlackRock Investment Institute.

China’s economy grew rapidly in the ten years before the pandemic, averaging 7.7% each year. But it now faces a set of acute challenges which we believe mean it is entering a significantly slower growth phase.

. . . The focus on Covid-related ups and downs in activity ignores another underlying issue that we believe will significantly challenge Chinese growth next year – and beyond.

For now, Alex Brazier and Serena Jiang – a former senior Bank of England official and a BlackRock economist respectively – expect the Chinese economy to grow by around 3% this year, due to the country’s zero-Covid policy and the decline in demand for the goods it produces.

After exports soared 10% in 2020 and 2021 as people splurged on new TVs, washing machines and other goods largely made in China, BlackRock believes exports will actually decline 6% annually in 2022 and 2023.

The implications for the renminbi are serious. Coupled with higher U.S. interest rates, this would “ultimately warrant a depreciation twice as much as seen this year,” BlackRock said in the report. However, it could add to the pain of Chinese companies that have borrowed in dollars and raise concerns about financial stability.

However, a 3% growth rate could be the new normal. Brazier and Jiang argue that over the longer term, China’s potential rate of economic growth has declined significantly, primarily due to an aging workforce. Our emphasis below.

Covid controls reduce potential production today. Although they could be eased, we still believe that the potential growth rate of the Chinese economy may have fallen below 5% and could fall further to around 3% at the turn of the decade. Why? More importantly, the working-age population, after growing rapidly, is now shrinking. . . Fewer workers means the economy cannot produce as much without generating inflation, unless productivity growth picks up. But we believe that international trade and technology restrictions, as well as tighter regulations on companies operating in China, will dampen productivity growth.

Here is a chart showing contract labor.

Given how essential China’s runaway growth has been to the global economy – remember when Jim O’Neil told everyone who would listen that China was adding the equivalent of one Greece every 11 weeks ? — the wider implications are . . . not great.

In the past, when countries faced a downturn, they could always rely on Chinese consumers and businesses to buy their cars, their chemicals, their machinery, their fuel — even as consumers at home tightened their belts. And they could rely on China to continue to supply an abundance of cheap goods, as China’s rapidly growing labor force allowed it to keep production costs low.

This is no longer the case. Recession is now looming for the US, UK and Europe. But this time, China will not come to his aid, or anyone else’s.

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