Nearly two years into the outbreak of the new crown epidemic, China and the rest of the world are still facing its negative impact. Last year, China’s economy rebounded thanks to a tough lockdown of the virus. But that recovery is starting to slow, a trend that could continue into 2022.
Senior Chinese government leaders set the course for economic policy for 2022 at a major economic planning meeting in December, emphasizing that “stability” is key. They warned that growth this year faces a “triple pressure” from shrinking demand, supply shocks and weakening expectations.
Indeed, the surging Chinese economy is facing multiple challenges. On the one hand, economic growth continued to be dragged down by the tightening of prevention and control measures for the rebound of the epidemic, consumer spending continued to slump, supply chains were blocked, and inflation pressures rose; on the other hand, the real estate market was down, regulatory controls were tightened, and external risks expanded.
The new crown epidemic is repeated
The continuation of the new crown epidemic and China’s epidemic prevention policies remain the key to determining the pace of economic growth. The Covid-19 outbreak, which had eased earlier, is on the rise again, expanding within China as more contagious strains of the virus continue to spread.
Alicia Herrero, chief economist for the Asia-Pacific region at Natixis, wrote in an analysis report: “Due to concerns about the spread of the epidemic, especially the recent emergence of a new variant of the virus Omicron, China will continue to Consumption will inevitably be affected by adhering to strict epidemic prevention measures. Business sentiment has not yet fully recovered to pre-epidemic levels.
Earlier, many factories in China’s Zhejiang province, one of the country’s manufacturing and export hubs, had already suspended operations to achieve the goal of zero cases. At present, a new round of epidemics has broken out in Xi’an, the main industrial center of the northwest region, and the authorities have also imposed a strict blockade on the place.
The Eurasia Group, a U.S. political risk consultancy, predicted in an analysis that the lockdown will continue for at least a year until China can successfully develop and fully roll out a vaccine against the new variant of the virus, during which time there will be more “economic disruption” “.
Consumption recovery is slow
Weak consumer spending has weighed on China’s economy. Consumer spending is likely to remain subdued in 2022 as the retail and service sectors have been devastated by repeated outbreaks.
Tianlei Huang, a fellow at the Peterson Institute for International Economics, told VOA: “China’s recovery from the pandemic shock has been very uneven. It’s mainly driven by investment and net exports, while consumption is driven relative to investment and exports. Said is still weak.”
A Caixin market survey released on Thursday (January 6) showed that the service sector business expectations index in December hit a new low since October 2020, as companies worried about when the global epidemic could be brought under control.
Employment and income instability caused by the COVID-19 pandemic has curbed residents’ spending power and willingness. Regulation of the extracurricular teaching industry has affected employment. Declining spending by local governments on infrastructure projects and turmoil in the real estate sector have both weighed on demand.
Analysts at U.S. investment bank Goldman Sachs expect Chinese consumer spending on food and clothing to pick up in 2022, but spending on services such as entertainment and education will remain sluggish, and Chinese household real consumption growth will remain low this year levels before the coronavirus outbreak.
Inflationary pressures are rising
The blockage of the global supply chain has not been effectively alleviated. The upstream price increase is being transmitted to the downstream. It is expected that the consumer price index (CPI) will further rise this year, and China is facing greater inflationary pressure.
Although many Chinese companies will be affected by rising raw material prices in 2021, through inventory buffers and lower profits, consumer prices will rise at a lower rate, and the trends of CPI and producer price index (PPI) are clearly separated.
Producers will be forced to pass higher costs on to consumers as raw material prices remain high and transportation bottlenecks, coupled with labor and energy shortages, disrupt supply chains into 2022.
In addition, many countries have introduced supportive policies to stimulate their economies hit by the epidemic, leading to a heightened outlook for global inflation, which may be passed on to China through rising import prices.
real estate deleveraging
Last year, China’s official measures to curb real estate debt caught the attention of global investors, with Evergrande, one of the country’s biggest property developers, defaulting on its debt, sparking fears of contagion.
At the economic meeting in December, the Chinese executives once again insisted on their position that “houses are for living in, not for speculation.” This means that China’s real estate policy may not have a big change in the short term.
Larry Hu, chief China economist at Australia’s Macquarie Bank, said in a note that real estate constitutes the “biggest headwind to growth in 2022”. He expects housing starts and square footage to fall at a faster pace this year, with real estate investment down 2 per cent.
In a report, ratings agency Fitch expects home sales to fall 15% this year, which will result in cash flow difficulties for five of the 40 developers in its rating spectrum and will ripple through steel, iron ore and Coking coal and other industries.
Huang Tianlei said that real estate and related industries are the pillar industries that drive the gross domestic product (GDP). More than 20% of the loan balances of Chinese banks are related to real estate, and nearly 40% of the total fiscal revenue of local governments comes from land transfer fees on average. and housing-related taxes.
“The Chinese government is not unaware of these risks and is currently trying to strike a balance between controlling systemic risks and reducing moral hazard in the real estate industry,” he said.
China continues to stress the importance of “common prosperity”, saying the goal is to make economic development more balanced. Last year, the government introduced a series of regulations to bring greater control over private companies in the name of regulation.
China’s once-vibrant Internet industry has been severely cracked down, with some companies shifting their focus to social welfare projects and donating some of their corporate revenue, and some of the most talented corporate leaders have been forced to retire.
The crackdown is killing China’s innovation potential and chances of becoming a tech powerhouse, with internet giants such as Tencent and Didi reporting disappointing earnings reports over the past few months.
In 2022, the drive to achieve shared prosperity continues to build, and while it remains to be seen how this guidance will be translated into more specific policies, more controls will undoubtedly cloud growth prospects.
Chinese Foreign Minister Wang Yi told diplomats across the country in December that the goal of this year’s work was “to strive to create a more stable and favorable external environment for the great cause of the party and the country.”
However, over the past year, China’s relations with several democracies have deteriorated, the US and China have renewed tensions, and China’s distance from the West is hurting investor sentiment and China’s long-term competitiveness.
“International politics is not moving in a constructive direction,” Iris Pang, chief economist for Greater China at ING, wrote in a note. “This will make it harder for China to grow steadily, especially when China wants to make breakthroughs in advanced semiconductor manufacturing that rival the technologies possessed by Taiwan, the United States, Japan and South Korea.”