China GDP: economic growth tipped to slow amid coronavirus, property crackdown and debt reduction campaign

Regulatory tightening in the property sector, deleveraging efforts and recurrent Covid-19 outbreaks are among the factors dragging on growth
Analysts in a Bloomberg survey are predicting a 3.6 per cent expansion in the fourth quarter, down from 4.9 per cent in the previous quarter

China GDP

Amanda Lee

Published: 2:00am, 15 Jan 2022

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China’s economic growth is likely to slow further in the last quarter of 2021 amid fallout from the Evergrande crisis and a resurgence of Covid-19 outbreaks, according to analysts.

The world’s second largest economy is expected to report its gross domestic product (GDP) figures for last year on Monday, with analysts in a Bloomberg survey predicting a 3.6 per cent expansion in the fourth quarter, down from 4.9 per cent in the previous quarter.

GDP growth for 2021 is likely to be 8 per cent, according to the Bloomberg poll. The Chinese government set a modest target of “above 6 per cent” growth for this year.

China revised down its 2020 growth rate to 2.2 per cent year on year, down from 2.3 per cent.

“In the near term, the property market slowdown remains the biggest threat to macroeconomic and financial stability in China,” said US investment bank JP Morgan in a research note this week.

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Real estate investment directly contributes 14-15 per cent of GDP, including construction and residential property development, and about 25 per cent of GDP if taking into account upstream and downstream sectors, JP Morgan estimated.

Beijing’s tough policy for reducing debt in the property sector has triggered a crisis at developer China Evergrande Group, while its peers such as Shimao could see a credit crunch in the coming month as a result of regulatory restrictions in financing.

“The company [Shimao] is facing heightened refinancing risks due to still-tight regulatory conditions, apart from the materially weakened capital markets access,” said S&P Global Ratings in a note to announce its downgrade of the developer this week.

“We don’t believe the company will be able to access capital markets in the next six months given the volatility in prices of its capital market instruments, both domestically and offshore.”

China’s economy had a robust start in 2021 driven by strong growth in exports, but began to lose steam in the second half amid a series of regulatory clampdowns in the real estate, technology and education sectors.

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The World Bank and the International Monetary Fund have already downgraded China’s growth forecast to 8 per cent for 2021 from previous estimates of 8.5 per cent and 8.1 per cent respectively.

They cited diminished support from exports and the government’s continued deleveraging efforts, recurrent Covid-19 outbreaks and lockdown measures among the factors dragging on growth.

China’s factory activity unexpectedly accelerated again in December, but the slender margin of growth highlights the pressure the economy is facing early this year, with policymakers under pressure to offer more support measures.

The official manufacturing purchasing managers’ index (PMI) rose to 50.3 in December, up from 50.1 in November, according to data from the National Bureau of Statistics.

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Although China enjoyed a strong trade performance in 2021, signs of an overall economic slowdown were highlighted by decelerating import and export growth in December.

In the final month of 2021, exports grew by 20.9 per cent from a year earlier to US$340.498 billion, down from the 22 per cent growth in November. Imports, meanwhile, rose by 19.5 per cent in December from a year earlier, to US$246.035 billion – down from the 31.7 per cent growth in November.

Beijing pledged to “front-load” policies to shore up the economy next year at the tone-setting annual central economic work conference that concluded in December.

While alarm bells are ringing in regards to economic growth prospects, analysts believe policymakers are not likely to pull out all the stops immediately when it comes to easing. Beijing is expected to take a gradual approach, rather than rush into expanding fiscal and monetary measures.

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“It doesn’t mean that regulation has come to an end, but it does mean that peak of regulation, peak of property tightening and peak of decarbonisation are behind us. In 2022, policymakers have more important things to do, i.e. defending the 5 per cent growth bottom line,” said Macquarie Capital in a note last week.

Credit conditions remain tight even though the People’s Bank of China lowered the reserve requirement ratio by 50 basis points and the one-year loan prime rate by 5 basis points in December.

Beijing is also likely to keep a tight grip on local government debt, which could dampen infrastructure spending – an important driver of economic growth – by scrutinising local government financial vehicles (LGFVs) in a bid to curb off-balance borrowing.

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“Due to the cooling of land sales, fiscal revenue [for local governments] in 2022 may be affected, local financial pressure will increase, and the risk of bonds [default] by LGFVs may rise compared with 2021,” said China Merchant Bank in a research note on Tuesday.

Despite weak consumer demand, the Chinese government is also likely to stick with its zero-Covid stance throughout 2022. China is now trying to contain clusters of the highly infectious Omicron strain as well as the Delta variant in multiple cities and provinces, with the Lunar New Year holiday and Beijing Winter Olympics just weeks away.

“China’s production has remained resilient under the current health control measures, with drags mainly on local consumption and services activity,” said JP Morgan.

“Exports and foreign direct investment both reached new historical highs in 2021, and there is no reason to expect better performance with a shift to a living with Covid policy.”