Despite the government’s measures, the Chinese economy is expected to continue to limp

China’s latest steps to contain the renewed outbreak of the corona and reviving activity in the battered real estate market have raised hopes that President Xi Jinping will place a strong emphasis on initiatives and measures to support the battered economy, which may lead to a strong recovery next year.

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But economists warn that so far these steps have not translated into a major change in Xi’s policies. The messages that came out of the recent Communist Party Congress only emphasized the Chinese president’s adherence to his goal of bringing China to economic self-reliance and “prosperity for all” – even at the cost of lower growth rates.

While the Chinese economy is expected to recover slightly in 2023 after a large decline this year, most economists doubt that in the near term it will return to the rapid expansion that characterized it before the pandemic.

In the short term, demand for Chinese exports declines as Western consumers cut spending. In some cities, the strict corona containment measures were renewed after the number of corona cases jumped. Home sales, which have been very low for many months, continue to deteriorate despite cuts in mortgage rates and other measures the government has taken to revive the market.

Government measures have limited effect

On Friday, China’s central bank announced it would reduce the amount of reserves banks must hold against deposits, a move designed to bolster lending to households and businesses, but economists said the move would have limited impact, given that appetite for new loans is not great.

In the longer term, China faces other challenges, including an aging population, high debt levels and pressure from the US, which is trying to limit China’s access to processors and other technologies.

As a result, “we believe that China’s growth potential will be significantly lower than what we estimated,” Goldman Sachs economists wrote. This, despite the fact that the Chinese economy was predicted to recover to some extent in the second half of 2023, when more corona restrictions are lifted. Beyond that, economists expect growth of only 4% – far below the levels that existed before the epidemic, when growth reached an average of 8.6% in the decade ending in 2019.

Louis Kuys, chief economist at S&P Global Ratings, predicts average annual growth of 4.4% between now and 2030, before falling to 3.1% in the following decade. Among the reasons for this, he cited the shrinking size of the working-age Chinese population and an increase in geopolitical tensions.

President Xi seems eager to make sure that the decline in growth does not worsen significantly, economists say. But he still doesn’t seem to want to do more than that, having repeatedly warned in recent years that too fast growth could exacerbate economic inequality and deepen the gap between rich and poor.

At the recent Chinese Party Congress, Xi Jinping presented an economic agenda and at the top of its priorities were increasing China’s self-reliance in food, energy and technology products; as well as debt reduction; and capital redistribution as part of the program known as “prosperity for all”.

Economists say that while Xi’s goals have the potential to help China, they could also hurt productivity, stifle private investment and hurt employment.

The private sector has cut spending in the past year

The government’s punitive measures against private Internet companies in 2020 to reduce the accumulation of too much capital in the field of technology caused a wave of layoffs that raised unemployment among young people to about 20% in the summer. These measures have caused many private companies to cut expenses.

The website, one of the largest online trading platforms in China, announced this week that it intends to cut salaries by 10% to 20% in 2023 for approximately 2,000 managers in order to improve the conditions of the more junior employees. This move is an example of a company that aligns with Xi’s vision of “prosperity for all”.

Steps taken by Beijing in order to slightly ease the corona policy and to strengthen construction entrepreneurs, who have entered into financial difficulties, can help to keep the Chinese economy from further deterioration, but their effect may be limited, or perhaps even worsen the situation in the short term if the spread of the corona continues. Now the country is expected to grow by about 3% this year, less than the government target of 5.5% set in March.

Beijing announced this month that it would ease lockdown rules and continue opening its borders to foreign visitors to help limit the economic damage the zero-tolerance coronavirus policy is doing to the country. The administration also introduced 16 measures designed to strengthen the property market, including encouraging banks to distribute loans to developers in bad shape, after punitive measures against over-leveraged real estate companies in the past caused many of them to enter financial distress and harmed the security of home buyers.

Those steps point to Beijing’s tacit recognition that “the very strict policies may have caused unnecessary damage to the economy,” said Kuys, the S&P economist. However, the government’s steps do not indicate a reversal of the president’s priorities regarding the economy, he added.

More than 80 cities are struggling with the outbreak of the corona virus

The new outbreaks undermine policy easing, with more than 80 cities struggling with coronavirus infections affecting provinces responsible for half of China’s GDP, according to Capital Economics.

In two of the largest cities in China – Guangzhou and Chongqing, which have a total population of 50 million people – extensive closures were imposed. Last week, workers clashed with police at the giant Foxconn plant in Zhengzhou, as part of the tightening of the corona restrictions, which led to fears of disruptions in production.

There is still uncertainty surrounding the real estate industry, which accounts for about a quarter of all economic activity in China. While Beijing’s latest measures may help developers avoid defaults and reduce the risk of financial contagion, they will have little direct effect on encouraging home purchases, Ting estimates. Lu, chief China economist at Nomura.

Analysts estimate it will take 20 months for China to sell all of its unsold housing stock. This is real estate for housing with an area of ​​2.2 billion square meters. In addition, many estimate that structural issues such as China’s demographic problems and tensions with the US will continue to oppress the economy. China’s working-age population, which peaked in 2014, will decline by 0.2% per year until 2030.

President Xi, it seems, recognizes the likelihood that China will not return to rapid growth. Two years ago he called for doubling the GDP by 2035 – a goal that would have required an average monthly growth of about 5% per year, but in the report at the annual meeting of the Communist Party this year, he omitted this goal and promised only to bring the economy to a state equivalent to “A medium-level developed country” by 2035. Barclays economists calculated that this would require growth of about 3.5% in the next decade.


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