Global briefing: The geopolitics of the Chinese recovery/ Fiscal rules in a wartime economy/ The politics of climate change/ De-dollarisation?/ The Netherlands

Perspectives on five things that matter this week

1. The geopolitics of the Chinese recovery

Chinese Q1 GDP growth was stronger than expected (4.5%) on strong post-Covid retail spending and exports. Many analysts upgraded their 2023 GDP growth forecasts to 5.5-6%+ - above the official 5% target.  

However, there are signs that this recovery process is faltering.  Industrial profits, manufacturing activity, housing sales, and exports showed signs of weakness in April.  Chinese equities have been muted through the reopening, and have been under downward pressure over the past few weeks on concerns about geopolitics and the strength of the recovery. 

China is not the only Asian economy encountering economic headwinds.  Although Hong Kong has benefited from China’s reopening (+5.3% growth qoq in Q1), several other Asian economies are slowing on weakening export growth: Taiwan entered recession last week; Singapore had -0.7% Q1 qoq growth.  And China faces additional external challenges, notably trade and investment restrictions from the US and Europe.

This will generate a response in terms of the extent of macro policy support.  And there are implications for China’s geopolitical stance.  Geopolitics is shaped by economic considerations in China, as in the West.  Indeed, the legitimacy of the Communist Party/Mr Xi is importantly based on an ability to deliver economic outcomes.  There are three responses to watch for.

First, expect a strengthening of initiatives around industry policy and import substitution, as China looks to support domestic activity and build domestic capabilities (from electric vehicles to semiconductors and tourism) – for both strategic reasons as well as to provide near-term economic support. 

Second, a more challenged domestic economic outlook may lead to a tactical moderation of China’s diplomatic rhetoric and action to head off risks of additional economic sanctions, notably from Europe.