Coronavirus: will China rescue the world economy?

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JAMES KYNGE: As China starts to recover from the coronavirus and the rest of the world feels the full impact of the pandemic, Beijing is turning its attention to the outside world, sending out masks, ventilators, and doctors to alleviate the humanitarian crisis. But there’s another big question about China’s role. Can it help rescue the world’s economy, just as it did after the great financial crisis of 2008? Back then Beijing launched a $590 billion stimulus package that got the Chinese economy firing again. The demand that generated alongside US and European stimulus efforts eventually helped restore global economic growth.

Can China repeat that feat again? That largely depends on two big things. The first is how quickly its own economy can bounce back from the huge virus-induced slump in the first quarter of the year, and the second is the extent to which China can act as a locomotive for the rest of the world. The FT has developed an index to track the speed at which China’s economic cylinders are starting to fire again.

So far, it’s showing a measured recovery. You can see that economic activity, which is shown by the red line, is lagging behind the grey line, which shows GDP growth last year.

If we break out the constituents of that line, you can see that some parts of the economy are stirring back to life. The amount of real estate sold, coal used in power stations, and traffic on the streets are all showing an upward trend, demonstrating that the economy is in recovery mode. But other readings, such as cinema tickets sold, container freight shipped, and the levels of pollution in the air, remain bombed out.

Most economists are predicting that this recovery will gain strength. And China will experience a sharp snapback in growth in the second quarter of this year. Such a bounce would help generate demand for the rest of the world too. After all, China has accounted for around 1/3 of global growth in recent years. The locomotive effect would intensify if China also launches a stimulus package like it did in 2009.

But most economists think that China is neither able nor willing to launch a big bazooka again. This is because the debts it has run up, partly as a result of the 2009 stimulus, preclude another credit-fueled bonanza. Back in 2009, China’s debt levels to GDP were modest. Now they are excessive, with Chinese bank loans equivalent almost half of global GDP.

According to Rhodium, a consultancy, most Chinese bank lending is used merely to cover interest payments on existing debts. This leaves very little spare for new investments. All this presents Beijing with an unpalatable choice. It could carry on with the policy of reducing indebtedness but in doing so suffer the consequences of an economic slowdown, or it could loose off another credit bazooka to stimulate the economy but thereby risk burying itself under a mountain of debt.

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