China’s Economic Update- Is it sinking?

According to Rajiv Biswas, executive director, and Asia-Pacific chief economist at S&P Global Market Intelligence, as multiple cities in China reported COVID-19 outbreaks, due to its impact, the Chinese economy has shown signs of disruption since February. He emphasized retail sales, industrial production, and port operations as trouble spots adding that the resulting disruption to retail sales and industrial production was severe during April and May and in Shanghai, port operations and logistics were heavily disrupted during April. As per the data from the World Bank, from 2003 to 2010, the Chinese economy grew close to 10% per year. However, this growth slowed throughout 2019 with 2.2% in 2020 and rebounding to 8.1% in 2021. Due to lockdowns, China recorded more than 6% in unemployment in April which was nearly 5% (4.8%) at the end of 2021. Here, analysts are of the view that it is the young workers and the smaller companies that have been hit hard the most. In 2021, due to disruptions in the real estate and tech sector, the Chinese economy faltered with multiple large Chinese property developers defaulting on loans worth billions of dollars. In the technology sector, regulators in China began a crackdown on the most powerful firms in 2020 which included the e-commerce and social media giants Alibaba Group and Tencent citing reasons like data security and monopolistic activity.  

According to Zerlina Zeng, a senior analyst at Singapore’s CreditSights research firm, the condition of the Chinese economy is a matter of concern for global markets because the slope of recovery is less steep in comparison to when it was during the COVID-19 outbreak in 2020. With missing of mortgage payments threatening the value assets which include property, disruptions to export shipping and manufacturing have hobbled supply chains globally adding to inflation and fears of recession. She added that government officials in China are trying to push the economy forward by spending on infrastructure. With the GDP showing signs of recovery and demand for cement and cars, including electric ones being up, officials are also relaxing the tough stance it took on the technology industry in 2021. She also stated that the economy looks good on a macro level and that it is going to recover but the slope of the recovery will not be as what the market had expected in the first quarter of 2022. She highlighted that in the future, the lockdowns will probably happen in neighborhoods rather than all of Shenzhen or Shanghai, still, the 5.5% economic growth in 2022 is a very ambitious goal [1].

Economic update till June:

According to the World Bank’s China Economic Update till June, the Chinese economy had a strong start in 2022, however, the economy slowed down in the same year. The report projected real GDP growth in 2022 to slow sharply to 4.3 percent which is 0.8 percentage points lower than that projected in the December issue of China Economic Update. This damage to the economy is large because of the Omicron outbreak which led to prolonged lockdowns from March to May in multiple parts of China but growth momentum is expected in the second half of this year, backed by strong policy stimulus to mitigate the economic downfall. Further, due to new variants of COVID-19, there would be more prolonged economic disruptions causing risks to stem from persistent stress in real estate that can cause consequences for the whole economy. While the economy is vulnerable to certain risks if the outbreaks are brought under control with restrictions fully dissolved, growth for the full year could be higher than projected due to the additional stimulus measures. Further, China will have to balance the measures to mitigate the COVID-19 outbreaks with proving support for economic growth. To achieve this balance, the government has increased ease in macroeconomic policy with large public spending, policy rate cuts, tax rebates, and more support for the property sector. With recurring outbreaks of the coronavirus and more uncertainties in the economy weighing on private investment and consumption and low effective policies, China has the macroeconomic space to mitigate the slowdown, however, the decision-makers face a dilemma regarding how to make the policy stimulus effective while restrictions in mobility remain. Most importantly, the concern is that China may rely on the older methods of fostering economic growth by debt-financed infrastructure and real estate investment because this model is ultimately unsustainable as the indebtedness of several corporations and local governments are already too high. Here, the focus of the stimulus could be shifted more towards the balance sheet of the central government and direct public investment for the transition of public infrastructure to environment-friendly. Support could also be drawn towards measures to encourage direct consumption, for instance, through the wider use of consumption vouchers which could uplift short-term consumer spending in locations where the pandemic restrictions have been removed. Finally, more encouragement towards consumption, innovation, tackling social inequality, and productivity growth including technologies that are crucial for its dual carbon goals could lead to a more balanced growth trajectory for the Chinese economy [2].

As per the data from the National Bureau of Statistics of China, China’s economy grew 0.4% Year on Year in the second quarter of 2022, missing the market consensus of 1.0% and slowing sharply from a 4.8% growth in the first quarter of 2022. Since a previous contraction that occurred in the first quarter of 2020 caused by the initial coronavirus outbreak in Wuhan, these latest figures have been the softest pace in expansion. The agency had described the results of the first quarter as “hard-earned achievements” also warning about the impact of outbreaks and “shrinking demand” at home noting the growing risk of stagflation in the global economy and overseas tightening of monetary policy. China has targeted the country’s GDP to reach around 5.5% in 2022 with the economy growing 2.5% in the first half of 2022. In the meantime, the data for June showed some improvement as the government in China initiated measures like taxes being cut for businesses and more money being channeled into infrastructure projects [3].

International Monetary Fund:

The International Monetary Fund (IMF) has revised its forecast for China’s economic growth to 1.1% in 2022 and by 1.3% next year. The IMF stated in its updated World Economic Outlook report, "In China, further lockdowns and the deepening real estate crisis have led growth to be revised down by 1.1 percentage points, with major global spillovers". According to the report, China’s growth was downgraded to 3.3 percent in 2022 which is the lowest in more than 40 years, and to 4.6 percent in 2023 which is a half-percent lower than it was in the previous report in April. The release of this forecast converges with the IMF report predicting that global growth will go down to 3.2 percent in 2022 and further to 2.9 percent in 2023. The baseline forecasts show slowed growth down by 6.1 percent last year to 3.2 percent in 2022 and 0.4 percentage points lower than in the April 2022 World Economic Outlook,”. Further, the report stated that it projects global growth to be 2.9 percent which is 0.7 percentage points lower than in April's World Economic Outlook. Regarding inflation, the IMF has revised its forecast for global inflation upwards to 6.6 percent in the world's advanced economies and 9.5 percent in emerging markets in 2022. Here, the IMF stated that it has been done because of food and energy prices as well as lingering imbalances in supply and demand. It further stated that it expects disinflationary monetary policy to "bite" in 2023, with modest growth in global output by 2.9 percent and that inflation is projected to be 3.3 percent and 7.3 percent in the advanced economies and developing ones respectively in 2023. Further, a tentative recovery occurred in 2021 which has been followed by increasingly uncertain developments in 2022 as in the second quarter of the year, the global output contracted due to downturns in Russia and China while facing under-expected results in US consumer spending [4].

OECD Report:

OECD’s Economic Survey of China for the year states that the Chinese economy post-COVID-19 outbreaks has grown strong and is on a path of gradual recovery. The pandemic had set back several rebalancing efforts from manufacturing to services, investment to consumption, and from rural to urban migration which needs to restart to foster growth that is both sustainable and inclusive. The reason for low investment efficiency was the investment-driven recovery which indicates continued misallocation of capital. Further, the corporate debt reached the same as pre-pandemic highs, and borrowing occurred due to a crisis or more long-standing factors which included the implicit guarantees for state-owned enterprises and other public entities. The slow growth in the economy and continued tax cuts implies lower ?scal resources to make growth more inclusive. Therefore, stable revenue sources from personal income taxes and dividends from state-owned enterprises are crucial. Despite, the aging of its population, China can still reap the “reform dividend” with measures to achieve sustained growth and product market competition enhancing reforms which can bring signi?cant productivity gains [5].

China’s Measures:

To mitigate the economic turmoil in the country, the State Council created several task forces and working groups that were assigned to specific provinces in the country that had more economic value. The task forces are meant to supervise and implement policies of economic stabilization. This effort was a step towards enhancing the regional economic hubs which would foster momentum for economic growth. This is considered a rare pro-growth move by the government where ministers are appointed to directly supervise and attend roles on the front line. A meeting and creation of five task forces led to the working groups being immediately dispatched to several economic provinces for economic stabilization services [6]. This decision comes at a crucial time as China is already balancing the COVID-19 preventive measures and lockdowns being imposed on certain regions without letting it affect the economy at the macro level.

Conclusion:

While the situation of China’s economy seems to be grim now, it must be noted that the concerns and due measures are already being taken by the government. Being aware of the Covid outbreaks and their impact on the recovery of the economy, the government is trying to balance both preventive measures as well as providing support for growth. The government’s commitment to economic recovery stands validated by the initiative of sending ministers to supervise working groups in special economic provinces across the country. With this plan, China aims to gain momentum for economic growth. Several reports have asserted that although China has been able to gain some economic growth, it would not be able to achieve the same growth rate as it did at the start of the year and that the desired goals are ambitious. Hence, even though the start of the year went well for the economy in terms of growth, the Chinese economy appears to be sinking which would require strong assistance in efforts for recovery.

Endnotes:

1.       Ralph Jennings, “What’s Next for China’s Economy?”, Voa News, 27 July 2022 https://www.voanews.com/a/what-s-next-for-china-s-economy-/6675578.html

2.      “China Economic Update – June 2022”, World Bank, 08 June 2022 https://www.worldbank.org/en/country/china/publication/china-economic-update-june-2022

3.      China GDP Annual Growth Rate, Trading Economics https://tradingeconomics.com/china/gdp-growth-annual

4.     “IMF revises China's 2022 growth by 1.1%, predicts major global spillovers”, Business Standard, 26 July 2022 https://www.business-standard.com/article/international/imf-revises-china-s-2022-growth-by-1-1-predicts-major-global-spillovers-122072601270_1.html

5.      Economic Forecast Summary, China Economic Snapshot, OECD, https://www.oecd.org/economy/china-economic-snapshot/

6.     “China's State Council assigns task forces to major economic provinces to oversee local pro-stabilization policy implementation”, Global Times, 29 August 2022 https://www.globaltimes.cn/page/202208/1274079.shtml

Pic Courtsey-Chris Slupski at unsplash.com

(The views expressed are those of the author and do not represent views of CESCUBE.)