- Mohamed El-Erian said China’s growth model no longer fits the global economy.
- Exports have fallen, he said, and growth in Europe and the US will remain muted for the foreseeable future.
- „China cannot rely on globalization to rescue its collapsed growth model.”
China’s disappointing post-Covid recovery highlights the country’s misalignment with the global economy, wrote Mohamed El-Erian.
After an initial burst of first-quarter growth, China’s industrial production, investment and consumer activity have all cooled sharply. The country is now teetering on the brink of deflation, while second-quarter GDP continues to point to weakness.
A Project Syndicate In the column, Allianz’s chief economic adviser attributed China’s recent slowdown to three main factors.
„First, as the most recent trade data shows, the global economy no longer supports China’s domestic growth dynamics,” El-Erian said, adding that Chinese exports fell 12.4% in June and imports fell 4.1%.
While the West has moved away from China and embarked on „risk-free” growth with the US curbing trade and investment, top trading partners in Europe are suffering from sluggish growth.
Second, El-Erian said Beijing is torn between a return to its traditional top-down stimulus measures and a more bottom-up approach that unlocks more economic potential.
Third, since China’s strict zero-covid restrictions ended late last year, there have been no spikes across the board in housing, commercial and property demand, he added.
„Growth in Europe and the United States is likely to remain subdued for the foreseeable future, and with the global economy still reeling from the impact of the most aggressive wave of interest rate hikes by central banks in advanced economies in decades, China cannot use globalization to restore its declining growth model,” El-Erian wrote.
In addition, companies diversifying supply chains from China will affect foreign direct investment, and US national security priorities will add more restrictions on trade and investment, he said.
Instead of relying on the rest of the world to save China’s economy, El-Erian suggested that Beijing look inward and reorient political policy toward an effective growth model.
However, this is particularly challenging in China, as the country suffers from political instability. Where central government can push for macro-level directives, their adoption is often limited by realities on the ground, such as concerns about increasing local debt.
But approaching policy from the micro-level is difficult, leaving China „in the middle of a mess,” El-Erian wrote. Local governments have more autonomy, and solutions to aging populations and high unemployment can be limited.
„The country’s industrial-policy framework has yet to strike the right balance between macro-level directives and provide sufficient operational autonomy at the micro-level,” he said.
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