The commentary was written by William R. Rhodes, CEO of William R. Rhodes Global Advisors, and Stuart Mackintosh, executive.
It will affect us all, so we should all care.
Problems in China could become a bigger problem this year and next because of the economic dangers and Chinese President's responses to them.
The world is focused on the atrocities being committed by Russia in Ukraine, and China's choice to stand with Russia is straining globalization's links.
China has economic challenges beyond the war. The threats to China's outlook are rising in four different areas: at home, in health, in debt, and in a fracturing globe.
China's leaders must ask whether their political support for a declining, weak, and unpredictable Russia is worth more to China than an interlinked world in which all competitors agree to general rules and norms.
The economy as a whole will be hurt by a decline in real estate. Most recessions are related to equity or housing busts. The effect of debt on home prices can cause a collapse in wider consumption if they go down. Underwater homeowners stop spending as their house prices fall.
China isn't at that dangerous juncture yet. The signs are not good. We would be naive to think that Chinese authorities can always effectively control prices in the country, or that normal economic boom-bust rules never apply in China. We hope they can manage housing better than the West did.
The effects of the policy are making economic matters worse.
China's zero- Covid policy, the toughest medical and public health response to the Pandemic anywhere, is in trouble. The country continued to operate largely free of the virus in 2020 and 2021.
The measures may be more expensive as the virus spreads. The city of Shanghai was shut down last week after an increase in cases to 20,000 a day. China's largest port is Shanghai, which contributes 4% of the country's GDP.
There are lock downs in China. The negative economic effects of its hard-to-sustain Covid policy will be visible in the months ahead. China's growth forecasts are being cut by economists.
Everyone outside of China may feel the same if demand in China weakens. Even though a shift from zero tolerance to a new approach is necessary to outsiders, it is not certain whether the central government is willing or able to do it.
The developed world is trying to contain inflation. Many loans made by Chinese entities as part of Beijing's Belt and Road Initiative are not only straining balance sheets in low-income countries across the globe, but they will also burden China's banks with nonperforming loans. That will affect the economic performance of those banks, which are key conduits for Chinese domestic investment, businesses and the economy.
AidData, an international development research lab based at the College of William and Mary in Virginia, says Belt and Road has saddled developing states with at least $385 billion in debts.
There are three negative dynamics in China: debt defaults, non-performing loans on the books of its largest banks and state lenders, and damage to diplomatic and geopolitical interests if it seizes nations assets as part of sometimes burdensome loan terms.
Not all lending is smart policy will be learned by China's leadership. China needs solvent borrowers and happy customers and allies, not bilateral sleight of hand, defaults, and angry citizens, even if the contract appears beneficial at first glance.
The engine that powers China's economic engine is at risk of stalling under the pressure of the Pandemic and Russia's war with Ukraine. New routes and links are being reconstituted with broken supply chains.
China's leaders must ask themselves if their political support for a declining, weak, and unpredictable Russia is worth more to China than a world in which all competitors agree to general rules and norms. Everyone benefits from a global architecture.
The U.S. warned that choosing Russia over the globalization in which their country is so deeply embedded is a shortsighted, damaging economic bargain, one which could result in secondary sanctions on Chinese firms.
Russia may continue the war, diminished, shrunken, fueled by her oil and gas, but ostracized by most countries in the world. China may have to pay a heavy price if it continues to back Russia at the expense of engagement with the trading system.
The Chinese government's official forecast of 5.5 percent growth rate in 2022 is too optimistic according to the tough challenges. It seems more likely than not that China will grow at less than 5 percent in the years to come, a rate not seen since the Tiananmen Square crisis.
It would be bad news for China and bad news for the rest of the world if that happened.
Let us hope the right choices are made.
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