SIM Report: China's economic slowdown, power cuts portend to heightened security, supply chain risks

SIM Report: Northeast Asia, Issue 15

A recent Reuters Corporate Survey showed that most Japanese firms are apprehensive about the potential for China’s economic headwinds to damage their business. Two-thirds expected China’s economy to withstand a moderate slowdown under state control. Around 13 per cent said that a slowdown would be temporary given that authorities will implement stimulus measures to invigorate China’s economy. About 10 per cent forecast China’s economy to reach its lowest point around spring 2022 before stabilising, and a mere 11 per cent forecast the slowdown to worsen into a financial crisis. Concerns have also spread overseas to China’s other major trading partners, with countries including South Korea and Thailand also susceptible to exogenous shocks caused by an economic downturn in China.

China has entered an economic slowdown that has prompted widespread concern and is set to reverberate beyond the country’s borders. China’s GDP grew at a rate of 4.9 per cent in the third quarter of 2021, the slowest pace since the Q3 2020 when the country was still recovering from the pandemic, according to data released by the National Bureau of Statistics on 18 October. Polls by Reuters and AFP indicated that the growth rate was significantly lower than what a majority of economists had forecast. The average estimates for the polls were 5.2 per cent and 5 per cent, respectively. China’s Q3 growth rate is down significantly from the Q2 growth rate of 7.9 per cent and a considerable drop from the Q1 growth rate of 18.3 per cent. The slump in economic growth has caused many economists to voice concerns around so-called ‘stagflation’, which is effectively an economy simultaneously experiencing slow economic output and high inflation.

Several factors are driving China’s economic slowdown. These include an intensifying and protracted clampdown by the ruling Chinese Communist Party (CCP) on large private sector firms deemed to exercise disproportionate influence over China’s economy, such as technology giants Alibaba and Didi. Another factor is lowered industrial output caused by coal and power shortages that has disrupted the supply chains of companies such as Apple and Tesla. Coal shortages have been exacerbated by a ban on imports from Australia as part of a long-standing diplomatic and trade dispute. Interruptions to electricity supplies are expected to worsen over China’s winter season. The European Union Chamber of Commerce in China (EUCCC) said it was monitoring with concern developments around China’s power crisis, which it says will probably cause shipment delays. Allegedly insufficient communications about power cuts have worsened operational challenges and frustrated continuity planning for various firms, according to the EUCCC. Looming large are also uncertainties relating to a potential debt default by major property developer China Evergrande Group. The company’s financial distress is symptomatic of a property bubble in the country that many fear will burst. However, this worst-case scenario is unlikely to come to fruition given Beijing’s likely desire to intervene to avoid Evergrande’s collapse and mitigate the risk of social unrest.

Domestically, slowed economic growth raises socio-political instability risks given that the CCP’s legitimacy in the eyes of China’s populace is contingent upon consistent development and betterment of people’s livelihoods. Economic difficulties in this sense present a challenge to the leadership of Chinese President Xi Jinping ahead of the CCP’s 20th Party Congress scheduled for October 2022, which will determine whether Xi remains in his position for a third term. Internationally, pressures on Xi are likely to be reflected by foreign policy designed to divert domestic attention from internal problems. Current trends indicate growing military assertiveness by China in the Indo-Pacific theatre and border regions such as the disputed Himalayan border with India. Increased willingness to engage in gray-zone tactics and brinkmanship strategies lowers the threshold for miscalculation and raises the risk of military confrontation. Overall, China’s economic slowdown is likely to impact its neighbours and trading partners through a denting of the regional economy, heightened security risks in territorially disputed areas, as well as supply chain disruption.

WANT TO READ MORE ANALYSIS IN THIS LATEST SIM EDITION...

Korean Peninsula: South Korean presidential election outcome to determine regional security risks

Open Source Intelligence Review