72 Finance & economics TheEconomistDecember4th 2021
2022, compared with a year earlier, accord
ing to Oxford Economics, a consultancy.
That would drag growth for the whole year
down to 3.8%. If housing investment in
stead crashed as badly as it did in America
or Spain in the second half of the 2000s,
growth in China could fall to 1% in the final
quarter of 2022 (see chart 2). That would
take growth for the year down to 2.1%.
Losses would leave “numerous” smaller
banks with less capital than the regulatory
minimum of 10.5%, the firm says.
Neither of these scenarios is inevitable.
Oxford Economics rates the probability of
a repeat of 201415 as “medium” not high.
(China’s inventory of unsold properties, it
points out, is lower now than it was seven
years ago.) It thinks the chances of a repeat
of an American or a Spanishstyle disaster
are low. Both the scenarios assume that
China’s policymakers would respond only
by easing monetary policy. But a more
forceful reaction seems likely. Although
the authorities’ “pain threshold” has in
creased, meaning they do not intervene as
quickly to shore up growth, they still have
their limits. “I don’t think the Chinese gov
ernment is dogmatic. It is quite pragmat
ic,” says Tao Wang of ubs, a bank.
Thus far, the property sector’s pain has
been masked by the strength of other parts
of the economy. Exports have contributed
about 40% of China’s growth so far this
year, points out Ting Lu of Nomura, anoth
er bank, as China provided the stayat
home goods the world craved. If the new
variant sends people back into their bun
kers, China’s exporters may enjoy a second
wind. More likely, export growth will slow,
perhaps sharply. Mr Lu thinks exports will
be flat, in priceadjusted terms, next year,
contributing nothing to China’s growth.
The economy will therefore need other
sources of help.
The most attractive stimulus options
bypass the bloated property sector, which
already commands too big a share of Chi
na’sgdp. The government could, for exam
ple, cut taxes on households, improve the
social safetynet and even hand out con
sumption vouchers. The problem is that
consumers may be slow to respond, espe
cially if their homes are losing value. Not
even China’s government can force house
holds to spend.
A more reliable option is public invest
ment in decarbonisation and socalled
“new” infrastructure, such as charging sta
tions for electric vehicles and 5gnetworks.
The difficulty, however, is that these sec
tors are too small to offset a serious down
turn in the property market, as Goldman
Sachspointsout.The government will thus try to stop the
property downturn becoming too serious.
Analysts at Citigroup, another bank, expect
that China’s policymakers will prevent the
level of property investment from falling
in 2022. That will allow gdpto expand by
4.7%. To accomplish this, the analysts
reckon, China’s central bank will have to
cut banks’ reserve requirements by half a
percentage point and interest rates by a
quarterpoint early next year. The central
government will need to ease its fiscal
stance and allow local governments to is
sue more “special” bonds, which are repaid
through project revenues.
It will also require more direct efforts to
“stabilise”, if not “stimulate”, the property
market. The government will need to make
it easier for homebuyers to obtain mort
gages and ease limits on the share of prop
erty loans permitted in banks’ loan books.
Citi’s economists think the authorities
may even show some “temporary forbear
ance” in enforcing their formidable “three
red lines”, the most prominent set of limits
on borrowing by property developers,
which cap developers’ liabilities relative to
their equity, assets and cash.
The one set of curbs China seems quite
unwilling to ease are the covid19 restric
tions on international travel. They will
probably remain in place until after the
Winter Olympics in February and the Com
munist Party’s national congress later next
year. They may remain until China’s popu
lation is vaccinated with a more effective
jab, perhaps one of the country’s own in
vention. (The authorities have been un
conscionably slow in approving the vac
cine developed by BioNTech and Pfizer.)
The government may also want to build
more hospitals to cope with severe cases.
Before covid19 the country had only 3.6
criticalcare beds per 100,000 people. Sin
gapore has three times as many.
Businesspeople in Shanghai have start
ed talking about travel restrictions persist
ing until 2024.Thevirus is highly mutable.
China’s policytowards it, however, is strik
ingly invariant. nHow low can you go
China, GDP growth scenarios
% change on a year earlierSources:OxfordEconomics;HaverAnalytics*Propertyslumpasin2014-1
†PropertycrashasinAmericaorSpaininthelate 2000s2FORECAST86420
26252423222021BaselineActualSevere downturn†Moderate downturn*EmergingmarketsHazards ahead
T
he news,as the second anniversary of
the pandemic nears, could be better.
The emergence of a covid19 variant, la
belled Omicron, has sparked a wave of sell
ing on financial markets, seemingly on
concern that a new highly transmissible
strain of the virus could set back economic
recoveries worldwide. With luck, Omicron
may prove manageable. But continued dis
ruptions from various variants of covid19
represent just one of three formidable
forces that will squeeze emerging markets
in 2022, alongside tighter American mone
tary policy and slower growth in China.
Start with American policy. Markets
knocked for a loop by Omicron sagged fur
ther on November 30th, after Jerome Pow
ell, the chairman of the Federal Reserve,
suggested that the central bank might ac
celerate its plan to taper its asset purchas
es. Thanks to the critical role of the dollar
and Treasury bonds in the global financial
system, a more hawkish Fed is often asso
ciated with declining global risk appetite.
Capital flows towards emerging markets
tend to ebb; the dollar strengthens, which,
because of the greenback’s role in invoic
ing, reduces trade flows.
In order to assess which places face the
biggest squeeze from a tightening Fed, The
Economisthas gathered data on a few key
macroeconomic variables for 40 large
emerging economies (see chart 1 on next
page). Large currentaccount deficits, high
levels of debt (and of that owed to foreign
ers especially), rampant inflation and in
sufficient foreignexchange reserves are
all indicators that can spell trouble for
countries facing fickle capital flows as
American monetary policy tightens.
Combining countries’ performance on
these measures yields a “vulnerability in
dex”, on which higher scores translate into
greater fragility. Some places are already in
serious trouble. Argentina, which tops the
list, faces an inflation rate above 50% and a
deepening economic crisis. Turkey’s fun
damentals look a little better, but its woes
are compounded by the government’s
stubborn desire to lower interest rates in
the face of soaring prices. The lira has been
hammered, losing 45% against the dollar
in 2021, diminishing the purchasing power
of Turks’ wages and pensions.
The second element of danger comes
from China’s slowing economy (see previ
ous story). When China falters, exporters
around the world feel the pain. It is, by aWASHINGTON, DC
Three threats to the economic recoveryCorrectionIn last week’s story on venture capital
(“The next stage”) we said that the average
valuation for an American seed-stage startup is
$3.3m. In fact that is the average amount of funding
raised in a seed round. Sorry.