About the author: Guonan Ma is a senior fellow at the Center for China Analysis of Asia Society Policy Institute.
China’s economy has had a big problem with economic growth this year but none whatsoever with inflation. In contrast, the U.S. has a big inflation problem but no growth problem so far, while the euro area has a big headache with both growth and inflation. Next year, China may see a better growth number and slightly higher inflation. One big reason for this prospect is the unfolding Chinese-style “QE”: quarantine easing combined with central bank assistance targeting China’s troubled property sector.
China’s gross domestic product growth is expected to be around 3% for the full year of 2022, decelerating sharply from the 8% seen in 2021 and way below the initial official target of 5.5%. The struggling Chinese economy has been under the combined weight of the costly zero-Covid regime, which had been a signature policy of President Xi Jinping for three years, and a painful property market downturn, which experienced a brutal contraction by 1/3 in the sales of new apartments since late 2021. Consumer price index inflation, on the other hand, should register a subdued pace of 2% this year, compared with the official target of 3%: Reluctant Chinese consumers simply robbed firms of any power to price-gouge.
Economic growth this year has mostly been supported by both state-led infrastructure investment and other government expenditure, such as mass testing and other administrative expenses of rolling lockdowns across Chinese cities. But private-sector demand was anemic, weighed down by both weak consumer spending and plunging property investment, in part because of the draconian pandemic control measures that stifled mobility, destroyed jobs, and depressed market sentiment. The property sector has also been hard hit by government policy, such as the so-called three red lines regulation aimed to curb excessive leverage of property developers, and further weakened by unfavorable structural factors, such as a bloated property sector following two-decade housing boom as well as the worsening demographic trends that feature a slower pace of urbanization, a shrinking population, and rapid aging. To make things worse, the draconian zero- Covid measures and the property sector’s downward spiral appeared to interact with and amplify each other.
Looking ahead, I expect China’s GDP and inflation to pick up to 4.5% and 2.5% in 2023, respectively. The modest growth recovery expected should be attributable to a low base of comparison this year and the ongoing government policy shifts. In the space of less than a month following the conclusion of the 20th Party Congress in mid-October, the leadership has rolled out a fresh policy bundle of supportive financing measures for property developers and a rapid pivot on the Covid strategy—a policy mix that will likely shape the 2023 economic outlook. In particular, they together could help stabilize and lift both private investment and consumer spending, although possibly with an uncertain lag after the initial policy rollouts.
Over the past month or so, while not officially abandoning the policy goal it calls “dynamic zero Covid,” Beijing has nevertheless started fine-tuning, easing, and dropping some control measures. Those adjustments began even before the recent protests across China. All signs now unmistakably point to a more- targeted and less- draconian approach. That’s likely to include discouraging overzealous local lockdowns and excessive mass testing, lighter quarantine protocols, stepped-up preparations for expanded and better vaccination (potentially including authorized use of foreign mRNA vaccines), and other enhanced Omicron-specific medical capacities. New narratives for forthcoming policy changes also appear to be developing.
Exiting this policy amid the ongoing transition to a new government leadership team poses risks and calls for caution. The reopening experiences in Singapore, Taiwan and Japan suggest China should expect higher caseloads following the initial easing of Covid-19 controls. But the heavy economic toll of the current stringent control measures can be trimmed, allowing the resultant savings to be used to assist the policy shift. This transition could still be messy, however. Reopening may initially trigger a jump in the virus’s spread, and given the largely absent herd immunity and the still- low vaccination rate for the aged, increased infection rates may put greater pressure on the healthcare system. The risk of a botched exit due to surging Covid-related deaths cannot be ruled out. The key for Beijing is to carefully but firmly navigate this process in the coming months and to minimize the expected uncertainties along the way.
On the property-market front, Beijing has announced a policy package to directly provide financing support for cash-strapped property developers. This is a major move, as previously most policies were directed at assisting stalled, pre-sold housing projects rather than at property developers themselves. The new policy package covers expanded credit lines, credit enhancement to bond issuance, and easier equity financing for developers, effectively reversing the three red lines. The Chinese central bank even provided interest-free loans to assist the completion of stalled presold projects. All these serve both as a deliberate policy signal to the market and as direct financing support to the developers on the supply side.
Therefore, I would expect a much smaller drag from the property sector to the overall Chinese economy in 2023, which should help boost headline GDP growth. But we have to wait and see whether the “optimized” Covid control measures can help boost sentiment on the demand side of the troubled property sector, which is likely to nevertheless remain a net drag on GDP growth. Moreover, the anticipated economic recovery in 2023 will remain fragile and face the other headwinds, such as the China-U.S. technological tensions, a likely contraction in Chinese exports, and a possible normalization of the infrastructure investment program.
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