After the Omicron outbreaks in early March, the normalization of the Chinese economy was disrupted. May saw an economic rebound, which will strengthen in the third quarter. Meanwhile, US-Sino ties are at a critical crossroads.

ON June 16, US National Security Adviser Jake Sullivan acknowledged that the Biden administration's stance on the Taiwan question "has not changed from previous presidencies" and that the White House sought to "stabilize ties" with China. Sullivan made his points at a conference of his former think tank, the Center for a New American Security (CNAS). Along with its corporate proxies and Big Defense donors, CNAS has played a key role in the plunge of US-Sino ties and the new Cold Wars (see endnote).*

During Sullivan's meeting with China's top diplomat Yang Jiechi, the latter had urged the US to set aside the geopolitical rhetoric and to manage the bilateral relations appropriately if the White House still cares about the overall stability of China-US relations. In economic issues, the state of the bilateral consensus has significant implications over global economic prospects.

COLD REALITIES Jake Sullivan at CNAS conference SOURCE: YOUTUBE SCREEN CAPTURE
COLD REALITIES Jake Sullivan at CNAS conference SOURCE: YOUTUBE SCREEN CAPTURE

In the Trump era, US trade policy was monopolized by the White House trade czar Peter Navarro, the protectionist China basher, who is now in legal trouble after refusing to comply with a subpoena relating to the Jan. 6, 2020 Capitol assault. In the Biden administration, Sullivan, as head of the National Security Council, has also had significant power over trade policy. In both cases, aggressive geopolitics has trumped over economic imperatives — as evidenced by the dire global economic prospects today.

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Until recently, the Biden administration has expected China to blink or break under its economic coercion. Recent economic data indicates that that's not in the cards. Instead, the administration may have paved the way for a premature US recession.

Return to growth and normalization

In April, analysts in Asia expected China's real GDP (gross domestic product) growth to fall from the expected 5 to 5.5- percent range to about 4.8 percent year on year during the first quarter. By May, global financial concerns in the West took a far gloomier view. Goldman Sachs cut its China GDP forecast for 2022 to 4 percent, declaring that one-third of China property firms could default by the year-end. UBS and JP Morgan followed in the footprints. Bloomberg Economics went still further, announcing growth could fall to just 2 percent.

Given the actual economic data, these "doom and gloom" projections seem to be misaligned with realities.

In early May, some Chinese authorities said they expect the impacts of the Omicron infections to be largely limited in the second quarter of the year, while GDP would grow about 2.1 percent. The forecast is predicated on supportive fiscal stimulus, including accelerated infrastructure projects and slashing taxes for businesses. The People's Bank of China, the country's central bank, has pledged monetary support, saying it will cut the reserve requirement ratio for the first time this year, releasing some $80 billion in long-term liquidity to spur the economy.

If accelerated growth can be achieved, a solid turnaround could be prominent in the third quarter with the second half of the year reflecting broader gains.

Moderate rebound likely began in manufacturing in May. Services activity also appears to have rebounded in May, as evidenced by the private Caixin survey. And the mid-year online shopping bonanza is contributing to consumption recovery, while e-commerce logistics may have rebounded in May.

Despite recent lockdowns and ongoing trade tensions, China's record and key role in global production underscore "the resilience of its export engine and the pull it continues to exert on manufacturing supply chains," as S&P recently stated.

Since late May, the real estate market has been improving with rising transaction volumes, as the central bank has lowered mortgage rates for first-time home buyers. During the recent holidays, more than 50 cities boosted promotions to increase local property sales. And Shanghai's gradual return to normal life and work routines seems to have come half a month earlier than anticipated.

After regulatory tightening of the tech sector, the worst may be over for Chinese stocks. The CSI 300 Index of onshore stocks is up, and foreign outflows have turned to inflows for the first time since March.

Certainly, China's rebound still faces a lot of uncertainties. Economic indicators are still significantly lower than in 2021 and interprovincial logistics remain affected. Nonetheless, the early signs are promising.

Most dangerous since 1945

In his January address at the World Economic Forum, President Xi Jinping warned: "If major economies slam on the brakes or take a U-turn in their monetary policies, there would be serious negative spillovers. They would present challenges to global economic and financial stability, and developing countries would bear the brunt of it."

That's where we are today, after misguided trade wars, the coronavirus depression and lingering pandemic-induced slowdowns, and the consequent, mismanaged inflation in the US and Euro area (although UK data is even worse), as evidenced by the Big Picture. With inflation at a 40-year record high in several major Western economies, aggressive rate hikes will undermine global recovery, once again.

The Big Picture: Record inflation in the West SOURCE: TRADINGECONOMICS, DIFFERENCE GROUP
The Big Picture: Record inflation in the West SOURCE: TRADINGECONOMICS, DIFFERENCE GROUP

Since January 2020, the US administration has missed a historic opportunity for a policy reset. Hence, the dramatic plunge of Biden's approval ratings. And had the Western powers helped to contain the Ukraine-Russia conflict through peaceful diplomacy, the ailing world economy wouldn't be facing the twin tsunami of energy and commodity crises, which will be further compounded by the global stagflation risks.

Stagflation could prove challenging in developing Asia. The Japanese yen tells the story.

After the 2008 crisis, the yen strengthened to 80 but eroded to 105 by year-end 2021. Since then, it has soared to 135 and is likely to climb with the Fed's new rate hikes and quantitative tightening. Taking into account Japan's government debt to GDP, which is soaring toward 270 percent, and the vital role of Japanese investment in Asia, particularly Southeast Asia, the worst is still ahead.

In the coming months, all major economies will have to cope with unprecedented pressures, particularly in the West. In China, the key issue is to foster and protect the rebound and preempt the effects of new virus variants proactively.

* "How Big Defense took over the White House — and PH plans," Manila Times, June 6, 2022; for the full 4,000-word analysis, see "The center of international insecurity," The World Financial Review, June 10, 2022.

Dr. Dan Steinbock is an internationally recognized strategist of the multipolar world and the founder of Difference Group. He has served at the India, China and America Institute (USA), Shanghai Institutes for International Studies (China) and the EU Center (Singapore). For more, see https://www.differencegroup.net.

This is an updated and broader version of an op-ed published by China Daily on June 13, 2022.