Explainer | How is China’s regulatory crackdown already hurting its economy?
- China’s move to clamp down on industries ranging from steel to education to property has roiled financial markets and curbed the outlook for growth
- President Xi Jinping still said this week that China will strive to complete major economic and social development targets set for this year
China’s campaign to clamp down on industries ranging from steel to education to property has roiled financial markets and curbed the outlook for growth in the world’s second-largest economy.
Beijing has signalled there is more regulation for businesses in years to come, but economists say authorities will need to carefully manage the pace and intensity of that against an economy weakening faster than expected this year following fresh virus outbreaks in the country.
And while it is difficult to quantify the direct effect of the regulatory restrictions on growth, how are some of them are playing out in the economy already?
In its first road map to achieving net zero emissions, Beijing pledged to increase the use of renewable energy and develop new technology to capture emissions, as well as to reduce emissions per unit of gross domestic product (GDP).
The furious pace of carbon reduction could curb economic growth if demand exceeds supply, economists say.
“Some provinces were rigidly uniform when cutting carbon emission and allowed for no flexibility, which could hurt economic operations,” said Ding Shuang, chief economist for Greater China and North Asia at Standard Chartered in Hong Kong.
“Economic growth is the short-term goal, while steel output reduction is the long-term goal. If there is a conflict, policymakers should prioritise economic growth and employment.”
China has been increasing restrictions on the nation’s runaway property market with measures including raising mortgage rates, temporarily halting land auctions in some major cities, and banning private equity funds from raising money to invest in residential developments.
Policymakers have reiterated their view that “houses are built for living in, not for speculation” and renewed calls for housing market stability at the July Politburo meeting.
The restrictions have already hit home sales, which have declined for two straight months in the nation’s first tier cities, data from China Real Estate Information showed.
Rosealea Yao, an analyst at Gavekal, substantially downgraded her forecast for construction starts for this year, predicting a 4 per cent decline in 2021 compared with an earlier estimate of 3 per cent growth.
Nomura Holdings sees property curbs accounting for more than half of the slowdown in GDP growth to 4.7 per cent in the second half of the year from 12.7 per cent in the first six months.
Beyond a drop in home sales and lower investment, restrictions on the real estate market will also affect the production and sale of construction materials, furniture and home appliances, and financial services for mortgages.
“The market has somewhat underestimated the downward pressure on the real estate industry,” said Lu Ting, chief China economist at Nomura.
“Investment and construction growth in the next six months to one year may slow down or even shrink, which will have a relatively large impact on the income of related industries and local governments.”
Economists say the impact on employment and consumption on edu-tech firms could be transitory, as the drop in spending could be offset by a pickup elsewhere.
Crackdown on private tutoring leaves industry, students and parents drawing a blank
“More jobs will be created at public schools after employment at after-school tutoring companies decreases,” said Zhou Hao, senior emerging market economist at Commerzbank AG in Singapore.
Such industry regulations will cause short-term structural adjustments, but are unlikely to have an impact on aggregate demand, he said.
The slow pace of borrowing means the economy will receive less of a boost this year from infrastructure investment than initially thought.
Infrastructure investment in July fell 10 per cent from a year earlier, the weakest since the pandemic last February, data from Huachuang Securities showed.
The slump in infrastructure spending will curb GDP growth by about 0.5 percentage points for the full year, said Iris Pang, chief economist for Greater China at ING Group.