Red Dragon Blues

What is going in China? The world’s second largest economy seems to be spluttering as the post-lockdown rebound fades.

The contrast with China’s great geostrategic rival, the US, is also painful. At a time when the relationship between the two superpowers is seemingly deteriorating, the unexpected strength of the American economy compared to the surprising weakness in China must be a sore point in Beijing.

Indeed, the China-US tensions are probably contributing to the weakness in China to the extent that Western firms are redirecting supply chains and trade in high-tech items like semiconductors is restricted. However, most of China’s problems are home-grown, summarised by veteran economist and China-watcher George Magnus as “excessive debt, low productivity, a flawed real estate market, weak income and consumption, poor demographics, highly regressive taxes, and a political governance structure that is controlling and generally hostile to entrepreneurship”.

Low inflation
Evidence of a spluttering economy is not just soft GDP growth, falling imports or subdued consumption. It is also in the fact that inflation is very low when it is still very high elsewhere. Last week saw markets cheering a US core inflation print that declined to a still high 4.7%. China’s core inflation is less than 1%, while headline inflation was slightly negative in July.

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