Will the Pandemic Hurt China’s Economy?

In the midst of the COVID-19 pandemic, everyone is eager to allocate blame, and no matter who you ask, China holds some of it. Many have speculated that China stands to suffer in the long term due to perceived mishandling of SARS-CoV-2 as it spread from their borders.

The logic flows like this: if the Chinese government allows regular disease outbreaks within their borders that shutoff manufacturing, firms will be forced to diversify their manufacturing to hedge risk. Thus, the Chinese grip on manufacturing will falter, and their economy will stagnate or at least slow.

However, a cursory examination of profit motives reveals how unlikely this is. With how many items are made in China already, co-locating manufacturing provides many benefits. The logistics and management overhead of international production poses an undesirable burden to corporations that seek profit for investors in the short-term, which is to say, almost all of them. Cheap and lax environmental regulations mean China will continue to draw in manufacturing.

While China is facing economic compression right now, amid demand slumps, in the long term, the opposite is true: China likely stands to gain from the economic crisis.

As nations grow wealthier, they generally follow the same pattern: agriculture, industrialization, manufacturing, and then finally a knowledge/service economy, with wages and standards-of-living generally rising through the process. Between manufacturing and the knowledge economy lies the theorized middle income trap[1], where wages have risen to where international manufacturing is unprofitable, but the workforce is generally untrained for a knowledge economy, causing stagnation. Evidence of this already exists in China: before COVID-19, the same construction workhorses that built a hospital in ten days were building ghost towns[3]. Production had outpaced domestic demand.

As economic growth slows, nations generally turn to international markets to obtain better returns, as we have explored in class. Owning key foreign assets can also help a slowing economic power maintain geopolitical influence. US firms accomplish this with foreign investment, owning portions of key foreign businesses and exacting influence via this ownership.

China does things slightly differently. Often, rather than investing in foreign projects in emerging economies, they offer loans. It’s no harm to them: they are sitting on loads of Chinese currency, and that money comes back into China when it’s used to pay Chinese construction firms to complete infrastructure projects, as is often stipulated directly in the loan contract. Those same firms that were otherwise building ghost towns. Some estimates have China owning billions of African debt, often a significant portion of countries’ GDP[4].

Debt to China creates Chinese influence. China could call back the debt and possibly foreclose on the infrastructure their loan developed, granting them ownership of infrastructure. In 2019, rumors circulated of them taking control of a key port in Kenya[5]. The mere threat of this creates submission to Chinese interests in emerging economies. This is called a “debt trap”[6].

You know what else often leads to the inability of countries to pay off foreign debt, resulting in the foreclosure of key infrastructure and deeper debt dependence? A global economic crisis. Like the one we’re in right now.


[1] https://journals.sagepub.com/doi/pdf/10.1177/097491011100300302
[2] https://www.scmp.com/comment/opinion/article/3036589/china-likely-avoid-middle-income-trap-investors-should-beware
[3] https://outline.com/hHtW4r (original: https://www.wsj.com/articles/chinas-ghost-towns-haunt-its-economy-1529076819)
[4] https://www.trtworld.com/africa/how-china-s-debt-trap-diplomacy-works-and-what-it-means-32133
[5] http://www.rfi.fr/en/africa/20190114-kenya-mombasa-port-china-debt-default
[6] https://qz.com/1497584/how-chinas-debt-trap-diplomacy-came-under-siege-in-2018/