China’s economy faces rocky ride to recovery

Mark O'Neill January 26, 2023 09:27

Everyone agrees that, after the end of Zero-Covid, China’s economy will recover in 2023. But by how much? Mainstream banks predict GDP growth of between 4 per cent and 5.9 per cent. The Rhodium Group predicts 1-3 per cent this year and in the medium term.

Last week Vice Premier Liu He told the World Economic Forum in Davos: “We are confident that, in 2023, China’s growth will most likely return to its normal trend. We expect a noticeable increase of imports, more corporate investment and consumption to return to normal this year.”

In 2022, GDP grew by three per cent, the lowest figure – except in Covid-affected 2020 – since 1976. Investment in domestic property fell by 10 per cent, the first drop since 1999, and property sales by value fell 26.7 per cent, the biggest decrease on record. Retail sales fell by 0.2 per cent. Industrial production grew 3.6 per cent in the year, down from 9.6 per cent in 2021.

In announcing the figures last week, Kang Yi, director of the National Bureau of Statistics, said: “the foundation of the economic recovery is not solid. There is a complicated international backdrop and domestic pressures.”

The other dramatic news was that China’s population fell in 2022 for the first time in more than 60 years and will likely continue to trend down over the long term.

So 2023 will not be a normal year. Beijing faces many challenges. One is the length and depth of recovery from Covid. Foreign estimates put the number of infected people this year in the hundreds of millions, with deaths between one and two million. This will negatively affect retail spending and home purchases. Fearful of catching the virus and its impact on their lives, people will save, not spend.

The second is the property crisis. Since 1990, the property sector has been one of the main engines of growth, accounting for about 30 per cent of the economy. But this has stalled due to the three years of the pandemic and government measures to limit over-building and excess lending.

Industry estimates put the number of empty apartments in China at 50 million, some in giant “ghost cities”. In addition, according to Shanghai E-House Real Estate Research Institute in July, stalled projects accounted for 3.85 per cent of China’s housing market in the first half of 2022, equal to an area of 231 million square metres. In late June last year, thousands of home buyers in at least 100 cities threatened to halt mortgage payments in protest at these stalled projects.

In a report at the end of December, the Rhodium Group, a research company based in New York, said that, despite the slowdown last year, property was still running too hot for underlying real demand. “We estimate a sustainable level of demand – consistent with buying houses to live in, rather than for speculation – at 550-750 million square metres a year. Annualised housing sales are 1.24 billion square metres. To reach sustainable levels, construction will need to continue contracting at the current rate for four to six more quarters.”

The next problem, it said, is credit. “China’s financial system simply will not be able to generate the same level of credit growth that it has in previous years,” it said in the report. “Over the next decade, we expect rates of credit growth to fall below 10 per cent. Lenders are becoming more cautious in response to rising credit risks in several asset classes, as implicit government guarantees for borrowers lose credibility. This is particularly apparent in lending to the property sector,” it said.

For the last 30 years, exports have been a major engine of growth. In 2022, exports rose 7 per cent thanks to its strong trade with Southeast Asia and an export boom of new energy vehicles, down from 29.6 per cent growth in 2021.

Earlier this month the Commerce Ministry said that slowing external demand and the rising risks of a global recession were posing the biggest pressures to the country's trade stabilisation, leaving "arduous tasks."

Negative factors also include Russia’s invasion of Ukraine and high global interest rates.

The IMF expects global trade growth this year to fall to 3.8 per cent from 5.5 per cent in 2022 or as low as 1.2 per cent if there is a global recession.

“We believe that GDP growth (in China) as low as 0.5 per cent is within the realm of the possible,” the Rhodium Group said. “If Beijing starts crucial, long-deferred structural reforms in earnest, growth between 1-3 per cent in 2023 and over the medium term would be a reasonable expectation.”

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Mark O'Neill

A Hong Kong-based writer, teacher and speaker.