China Economy Is Shifting Course on Covid, Economy Growth Is Improving

This year, China’s economy has struggled dramatically with economic growth but not at all with inflation. While the euro region is experiencing growth and inflation problems, the U.S. has a significant inflation problem but no growth issues. China might experience more robust growth and slightly higher inflation the following year. This possibility is primarily due to the developing Chinese-style “QE,” which consists of central bank assistance and eased quarantine measures targeted at China’s struggling real estate market.

For 2022, China’s gross domestic product growth is predicted to be approximately 3%, a dramatic slowdown from the 8% forecast in 2021 and much below the initial stated target of 5.5%. The pricey Zero-Covid rule, which had been President Xi Jinping’s flagship policy for three years, and the painful real estate downturn—which saw a shocking fall by 1/3 in the sales of new dwellings since late 2021—have combined to weigh heavily on the faltering Chinese economy. Contrary to the stated aim of 3%, consumer price index inflation is expected to run at a moderate pace of 2% this year in China due to hesitant customers who stripped businesses of the ability to raise prices.

Both state-led infrastructure investment and other government spending, such as mass testing and other administrative costs of rolling lockdowns around Chinese cities, have mostly underpinned economic growth this year. But due in part to the harsh pandemic control measures that restricted movement, eliminated jobs, and dampened market sentiment, private-sector demand was anemic, pushed down by both weak consumer spending and declining property investment.

Image: Ji Haixin/HPIC/dpa/picture alliance

Government policy, such as the “three red lines” regulation intended to reduce property developers’ excessive leverage, has also significantly impacted the real estate market. Unfavorable structural factors, such as a bloated market following a two-decade housing boom and deteriorating demographic trends, including a slower rate of urbanization, a declining population, and rapid aging, have further weakened the sector. The harsh Zero-Covid regulations and the property sector’s downward spiral both seemed to interact and intensify one another, which made matters worse.

In 2023, I predict that China GDP would increase to 4.5% and its inflation rate to 2.5%. The low base of comparison this year and the ongoing changes in government policy should be held responsible for the predicted modest economic recovery. The leadership has unveiled a new policy package of financial incentives for real estate developers and a swift pivot on the Covid strategy in the less than a month after the completion of the 20th Party Congress in mid-October. This policy combination is expected to influence the economic forecast for 2023. Together, they could, albeit possibly with a lag after the initial policy rollouts, help stabilize and boost consumer spending as well as private investment.

Beijing recently unveiled a policy package aimed at directly assisting cash-strapped real estate developers with funding. This is a significant change from the past, when most regulations were aimed more towards aiding housing projects that had already been sold out than at real estate developers themselves. The three red lines are effectively reversed by the new policy package, which includes increased credit lines, credit enhancement to bond issuance, and simpler equity financing for developers. Even interest-free loans were made available by the Chinese central bank to help stalled presold projects be finished. All of these provide direct financial support to the supply side developers as well as a deliberate policy signal to the market.

The housing difficulties have weighed on China’s economy, as well as a stringent zero-Covid policy that has curbed consumer and manufacturing spending. China Gross domestic product (GDP) grew by 3.9% in the q3 compared to the same period a year prior, bringing the first nine months’ growth to barely 3%, significantly just below forecasting of 5.5% set in March.

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