Coronavirus: will China rescue the world economy?

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JAMES KYNGE: As China begins to recover from coronavirus and the rest of the world is feeling the full impact of the pandemic, Beijing turns to the outside world, sending masks, respirators and doctors to alleviate the humanitarian crisis . But there is another big question about the role of China. Can it help save the world economy, as it did after the great financial crisis of 2008? At the time, Beijing launched a $ 590 billion stimulus package that restarted the Chinese economy. The demand that was generated in parallel with the American and European recovery efforts ultimately helped restore global economic growth.

Can China repeat this feat? It depends largely on two big things. The first is the speed with which its own economy can rebound from the huge virus-induced recession 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 Chinese economic cylinders start to fire again.

So far, it shows a measured recovery. You can see that economic activity, represented by the red line, is lagging behind the gray line, which shows GDP growth last year.

If we break down the constituents of this line, you can see that parts of the economy are coming back to life. The amount of real estate sold, the coal used in power plants and the traffic on the streets are all showing an upward trend, demonstrating that the economy is in recovery mode. But other readings, such as movie tickets sold, containerized freight shipped and air pollution levels, remain bombarded.

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Most economists predict that this recovery will strengthen. And China will experience a sharp drop in growth in the second quarter of this year. Such a rebound would also help generate demand for the rest of the world. After all, China has accounted for about 1/3 of global growth in recent years. The locomotive effect would intensify if China also launches a recovery plan as it did in 2009.

But most economists believe that China is neither able nor willing to launch a large bazooka again. Indeed, the debts that it contracted, partly because of the revival of 2009, prevent another windfall fueled by credit. In 2009, China’s debt level relative to GDP was modest. Today, they are excessive, with Chinese bank loans representing almost half of the world’s GDP.

According to Rhodium, a consulting firm, most Chinese bank loans are used only to cover interest payments on existing debts. This leaves very little room for new investments. All of this presents Beijing with an unpleasant choice. It could continue its policy of reducing debt, but thus suffer the consequences of an economic slowdown, or else lose another bazooka of credit to stimulate the economy but thus risk being buried under a mountain of debts.

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