China tries to ease pain of slowdown

Beijing is easing some earlier tightening policies amid uncertainty around Covid-19, the property-market slump and a looming drop in export demand.

Police officers in protective gear spray Covid-19 disinfectant at Nanjing port in China’s eastern Jiangsu province. Picture: AFP

Last year, Chinese policymakers shook up the world’s second-largest economy just as its rebound from the pandemic was starting to wear off, unleashing a flurry of measures to address longer-term economic imbalances – and delivering a short-term hit to business activity.

Now, China’s leaders are hoping that they can put a floor under the economy, which officials said Monday expanded by just 4 per cent in the fourth quarter of last year, the slowest pace since the beginning of the Covid-19 recovery in the second quarter of 2020.

To do so, they are easing some of their earlier tightening policies, for example by increasing mortgage lending to home buyers. The country’s central bank on Monday cut two key interest rates that could pave the way for further cuts to the benchmark lending rate.

But they face rising uncertainty around the spread of the Covid-19 pandemic, as well as a continued property market slump and what economists say is a looming drop-off in export demand during a politically important year. Chinese leader Xi Jinping is expected to break with recent precedent and seek a third term as leader at a closely watched Communist Party meeting later this year, and the political imperative for growth and stability has raised the likelihood that Chinese policymakers will respond to any weakness by easing some of its regulations.

While the country’s gross domestic product expanded by 8.1 per cent in 2021 from a year ago, the figure “masks a significant loss of growth momentum”, said Eswar Prasad, a professor of trade policy and economics at Cornell University, who pointed to weak consumer demand caused by China’s strict Covid-19 measures.

“More stimulus measures are likely to be unveiled if domestic and external circumstances remain unfavourable,” said Mr Prasad, a former head of the International Monetary Fund’s China division.

There are risks too in easing too quickly or dramatically, underscoring the tightrope that authorities must walk this year.

Loosening restrictions threatens to leave unresolved long-festering issues such as a frothy housing market, a fast-declining birthrate and widening social inequality, which could further undermine Beijing’s goal of ensuring stable growth.

Monday’s data showed the number of newborns in China falling for a fifth straight year in 2021 to the lowest level in modern Chinese history, despite new measures unveiled last year by Beijing to encourage births.

“The more you emphasise stability, the more you emphasise avoidance of defaults, redistribution and paying the costs of indebtedness, the more it creates conditions for instability down the road,” said George Magnus, a research associate at Oxford University’s China Centre.

After staging a spectacular rebound from the pandemic based largely on its manufacturing sector, China’s economy quickly slowed in the second half of 2021 as a flurry of regulations roiled private businesses in the consumer internet, education and real estate sectors.

The direction of China’s recovery will be watched closely around the world, which has grown increasingly reliant on China as a market for its commodities and as a hub in the global supply chain.

Manufacturers in Germany, Europe’s biggest economy and industrial powerhouse, are feeling the squeeze by the slowdown in China, which was Germany’s largest trading partner in 2020. German exports to China declined 4.2 per cent in November, year over year, to €8.9bn ($14.1bn) while its exports to the US surged about 15 per cent to €11bn over the same period, according to the federal statistics agency.

At Volkswagen, global vehicle deliveries fell by almost a third in the three months through December, to about 1.9 million. Sales in China, the company’s biggest single market, were particularly weak, declining about 37 per cent year-over-year in the last quarter of 2021 to about 755,000.

Many economists expect Beijing to set a growth target of at least 5 per cent this year, largely in line with the country’s pre-pandemic trajectory. If economic conditions deteriorate more dramatically, China could respond by further easing some of the earlier tightening policies.

Wei Yao, chief China economist at Societe Generale, said new easing measures, including attempts to stimulate infrastructure spending and consumption, could come as early as annual legislative meetings set for March.

One sector to watch will be the property market, which by some estimates accounts for roughly a fifth of overall economic activity in the country.

Though many economists predict the real estate slowdown to stabilise by mid-year, the sector is unlikely to bolster the economy as it has in the past.

“The government is managing a downturn in the real estate sector to avoid any kind of crisis, but I also don’t expect too much growth from that,” said Bert Hofman, director of the East Asian Institute at the National University of Singapore and a former World Bank economist.

Another risk is Covid-19 and China’s zero-tolerance policies to contain the virus’s spread. Beijing has shown little appetite to change course on its “zero-Covid” approach, which economists say could mean more economic pain this year as consumers spend more frugally.

Monday’s data showed retail sales, a gauge of consumer spending, weakening further in December, rising just 1.7 per cent from a year earlier. Over the past two years, monthly retail sales have increased just 3.9 per cent on average in year-over-year terms, far below the roughly 8 per cent level before the pandemic.

China’s headline measure of joblessness, the urban surveyed unemployment rate, rose to 5.1 per cent in December, the third straight monthly increase. The jobless rate for the 16-24 age group remained unchanged at 14.3 per cent.

“The biggest downside risk for 2022 is still with consumption, due to lockdowns and public concerns over Omicron,” said Yue Su, China economist at the Economist Intelligence Unit.

Ms Su worries that stimulus efforts might not reach the private sector, which supplies 80 per cent of jobs in urban areas. Further weakness among private companies could portend a decline in investment, rising joblessness and stalled income growth, she said.

China’s economic slowdown could also weigh on Latin America, a supplier of commodities to the Asian giant.

Latin America’s growth is projected to be 2.1 per cent in 2022, down from 6.3 per cent in 2021, partially driven by weaker economic activity in China, the region’s top trade partner, according to a recent report by the United Nations’ Economic Commission for Latin America and the Caribbean. That comes as metal prices are expected to fall more than 8 per cent and agriculture and energy prices are projected to remain stable, the UN says.

The Wall Street Journal