April 13, 2024
World Economy

Chinese Premier Li Qiang is unveiling the country’s growth target, but investors fear Beijing’s decisions could hasten a worldwide recession

But this strategy poses two huge risks for global markets.

First, investors worry that Chinese policymakers will misjudge the transition, and inadvertently push China’s economy into a lengthy period of economic stagnation, similar to that suffered by Japan in the 1990s. This will sap global demand, leading to falling global prices for commodities, such as iron ore and coal.

The even bigger risk is that as China steps up its production of higher tech products, it will flood global markets with the electric vehicles, computer chips and complex machinery that Chinese producers can’t sell in their home market. This glut of higher-end manufactured goods, coupled with anemic demand, will push prices sharply lower. In other words, China’s industrial overcapacity will unleash deflationary forces worldwide.

Trade tensions

Of course, China’s push into higher-value industries that advanced economies see as being key to them maintaining a technological edge is further stirring trade tensions.

The United States, Japan and countries in Europe have provided billions of dollars in support for these industries, and have either imposed restrictions or threatened to impose tariffs to restrict cheap Chinese imports.

Already, weak Chinese growth combined with growing Chinese competition in traditional high-value tech products is taking a toll on growth overseas.

In its latest monthly report, the Bundesbank warned that Germany – the biggest driver of European growth – is probably in recession as a result of weak external demand, and as high interest rates dampen domestic investment.

Japan also slipped into recession at the end of last year, as consumption and capital spending remained sluggish.

The sluggishness in some of the world’s major economies comes amid growing fears that a global wave of commercial property loan defaults could soon engulf the global financial system.

Already, banks around the world are sitting on huge mark-to-market losses on their bond portfolios as long-term interest rates have pushed sharply higher. (Yields rise as bond prices fall.)

But banks are bracing for a spike in commercial property debt defaults as soaring office vacancies and plunging commercial property values make it difficult for property developers to roll over the huge volume of loans that mature in the next few years.

Investors worry that a fresh commercial property crisis is enough to trigger a renewed debt deflationary spiral. And this, combined with the deflationary forces coming out of China, could result in a global recession.

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