Crypto News: A tectonic shift in China heralds new era for global economy

Tighter fiscal and monetary policies across much of the world are starting to cut into economic growth. A key question now is whether we avoid recession and what role China plays as its economy reels from lockdowns.

Officials across the globe, with a few exceptions, are responding to global inflation by tightening the screws of monetary policy. Combined with less expansive fiscal policy, that means slowing growth. The crucial question now is whether we can steer clear of recession and what role China -- and its evolving relationship with America -- plays.

What started out as a supply-chain driven rise in prices has become a more entrenched and disconcerting generalized inflation problem. Governments in most of the major industrialized nations have responded with the biggest simultaneous tightening of fiscal and monetary policy that many of us have ever witnessed. They're hoping that will break the back of inflation without breaking their economies. There is, though, one very large variable that's beyond their control: China. In the wake of the 2008-09 crisis, it helped pull much of the western world out of recession as it was still growing rapidly. This time, China's economic woes and transitioning economy could have a much different effect.

First, there's the effect of China's Covid-zero policy, both immediate and longer term. Right now, the lockdowns aimed at curbing Covid are also putting the brakes on the local economy — both in terms of production and consumption — and that's having a flow-on effect in other countries. But they also have a broader transformative potential. The upshot of these lockdowns could be a greater emphasis on internally-driven consumer demand and less focus on the country's role as a cheap manufacturing base. China is a lot richer than it once was and there are other countries that can assume the mantle of low-cost manufacturing hub, at least in part. On the flipside, lockdowns mean that there's potentially a lot of pent-up domestic consumer demand. So, this could turn out to be the ideal time to engage in a shift that China needs to make anyway as its population ages and the demographic dividend it once enjoyed rapidly dwindles.

Another big change concerns the behavior of both producers and consumers globally. On the one hand, there's a growing tendency to shift away from just-in-time global supply chains in the wake of pandemic disruptions. Over the past few decades, after the integration of China and other emerging markets into the global economy, companies have come to engineer supply chains to reduce costs and increase efficiency, taking for granted the frictionless movement of capital and goods across borders.

And that meant just-in-time manufacturing with minimal inventory accumulation made sense. The benefit was lower-cost goods. The cost was wage growth for ordinary workers. But the pandemic and the fallout from the Russia-Ukraine war is only likely to turbocharge companies' move away from these formerly profitable — but apparently more brittle — models, looking more toward regional suppliers, increasing lead times and bolstering inventories.

On the demand side, meanwhile, consumers scarred by the pandemic (and war-related commodity-price shocks) look to be durably shifting their mix of goods and services in unpredictable ways. All that is likely to mean more supply chain near-shoring, greater power for workers in individual markets to demand wage increases and potentially less global integration. That adds up to greater inflationary pressures of course, but also unravels to some degree, networks of global interdependence that have grown and grown over recent decades. Perhaps the biggest of these is the relationship between the US and China.

5.5%

The Chinese government's official GDP growth target for 2022

There was a time when we talked about "Chimerica" to denote the tied-at-the-hip relationship between Chinese manufacturing and American consumption. In the aftermath of the 2008-09 financial crisis, there was a lot of angst about that relationship ending abruptly for politically-driven reasons.

That kind of sudden rupture didn't happen and China was, in many ways, the country that pulled the global economy out of recession after the Great Financial Crisis. Having been an increasingly important engine for growth and a source of disinflation over decades, China stepped up to the plate back then.

The situation now, though is very different. The country is going through what Premier Li Keqiang recently called its worst patch of growth of the pandemic. The slowdown is so vexing, we're now getting discordant messaging from China's leaders. So instead of being a savior, China could in fact be a burden to the global economy: acting as a drag on growth and potentially even exporting more inflation due to broken supply chains.

That's potentially bad news for the world as a whole. But for America, maybe it doesn't matter quite as much as it once did. Even before the pandemic, some gradual and subtle drifting apart had come to pass, and Covid seems to have given that a boost. US consumption is holding up well and even though markets are flagging concerns about growth, recession is far from a foregone conclusion.

One other leg to the US-China relationship that bears examining is the effect of Chinese savings. The glut of extra money spilling out from China has provided a significant boost to global risk assets — in particular US equities. A combination of more spending and/or slower growth in China, ultimately means less to invest abroad, removing a key tailwind for US stocks, which are already taking a beating amid the prospect of slower American growth and higher borrowing costs.

A couple of last points on supply chains. The transition to regional supply chains will be expensive. Supply chain resiliency implies duplication, inventory buffers and proximity to customer at the expense of efficiency and cost. Some of those costs will be borne by end consumers. And that means higher inflation.

And when you have higher inflation embedded in the system, policy makers have to make a choice on whether they're willing to accept that inflation, say 3% inflation, instead of 2%.

The silver lining in all of this is that after years of wages lagging productivity growth, we could be on the cusp of wages catching up. If you look at US productivity growth, the post-World War 2 trend is solid. But from the 1970s onward, hourly compensation stalled. And the gap is now enormous.

Source: EPI Source: EPI

The onshoring of supply chains makes it more likely this will change.

So, in the end, there are some reasons to be optimistic. While the changes within China and between China and the US likely mean higher inflation, they also could mean higher wages as a proportion of output. Once we get through the immediate inflationary surge — and the policy response -- the economic landscape for ordinary workers could be a lot better than it has been in a long while.

"We are in a period of maximum uncertainty vis-a-vis China with the ongoing lockdowns. It has important spillover impact for the global economy, potentially exacerbating the already troublesome supply-side situation."

Ben Powell

Asia-Pacific chief investment strategist at BlackRock Investment Institute

The latest MLIV Pulse survey projects Beijing to continue lockdown polices
The top US diplomat is now taking direct aim at President Xi
Despite the worries, US consumers haven't faded yet
More Covid problems in China, this time near the North Korean border
China has detained Beijing lab staff for "failing to test samples properly"

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