Explainer | How much is China’s economy struggling and how much worse can it get?

World’s second-largest economy has been facing setback after setback, and it is unclear whether recent GDP figures will mark the start of a sustainable recovery
China’s restrictive zero-Covid policy, property downturn and waning confidence among consumers and investors remain outsized economic threats

China's economic recovery

Frank Tangin Beijing

Published: 12:30am, 2 Nov 2022

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China’s economy is experiencing a mild rebound and could be poised to receive a boost of momentum with the swearing-in of a new leadership line-up.

The world’s second-largest economy faces some stiff headwinds, including a property downturn, weak private investment, waning consumption and business confidence, plus external challenges that are only expected to intensify in the coming years.

Market worries seem to stem from Chinese politics and the stringent zero-Covid policy, and analysts say that the nation’s economic fundamentals provide a solid foundation on which policymakers should be able to build in the coming months.

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How bad is China’s economy?

The Chinese economy appeared to be weathering the pandemic storm, experiencing an average growth rate of 5.1 per cent over the 2020-21 period. But then Omicron took hold early this year.

The rigid implementation of Beijing’s zero-Covid strategy, including snap lockdowns, mass testing and sometimes forced quarantine, plunged the nation’s second-quarter GDP growth to only 0.4 per cent.

The rebound, however, appeared to be under way as third-quarter GDP growth reached 3.9 per cent in both year-on-year and quarter-on-quarter terms, thanks to Beijing’s partial relaxation of coronavirus controls, and strong fiscal and monetary support, as well as pressure on local officials to deliver accomplishments.

The major economic headache includes a plunge in the property sector that will continue to weigh down growth, while the still-high level of jobless young adults poses a threat to social stability.

Investment in the property sector, which previously accounted for nearly one-fifth of growth, fell by 8 per cent in the January-September period, down from 7.4 per cent in the first eight months. The unemployment rate for those aged 14-24 reached 17.9 per cent in September, down from a record high of 19.9 per cent in July.

Beijing has loosened its purse strings and stepped up credit expansion to boost infrastructure investment. However, private investment and consumption remained subdued amid an erosion of confidence, and this remains a long-term challenge for policymakers.

Private investment, recording 2 per cent year-on-year growth in the first nine months of 2022, lagged behind the national growth of 5.9 per cent in fixed-asset investments. September’s growth in retail sales, a gauge of consumption, stood at 2.5 per cent, while monthly growth averaged only 0.7 per cent over the first nine months.

Are there any bright spots for China’s economy?

The January-September GDP growth of 3 per cent is certainly lower than in the past, but it is rebounding and still better positioned than major economies.

According to the latest International Monetary Fund projections, China’s full-year growth was estimated at 3.2 per cent, higher than the 2.4 per cent average among advanced economies, including 1.6 per cent for the United States, and 1.5 per cent for Germany.

China’s industrial system performed well, and it remains a key supplier to the global market, with a 12.5 per cent rise in exports seen during the January-September period.

The better-than-expected third-quarter performance allowed UBS to revise up its 2022 growth estimate by 0.5 percentage points to 3.2 per cent while keeping its next-year growth estimate at around 4.5 per cent.

Meanwhile, China does not face the high inflation being seen in major Western countries, with just 2.8 per cent growth in its consumer price index for September.

This is much lower than the 8.2 per cent rate in the US, 9.9 per cent in euro zone, and 10.1 per cent in Britain, and it provides China with more wiggle room in its monetary policy loosening.

China’s huge market size, given the consumption potential of its 400 million middle-income people and its widening of market access, continues to lure foreign capital, despite Beijing’s apparent shift to greater self-reliance via its dual-circulation strategy.

Foreign direct investment rose 20.2 per cent to US$138.4 billion in the January-August period, year on year, according to government data.

What are the future challenges for China’s economy?

The immediate challenge faced by the world’s second-largest economy is how Beijing’s policymakers reconcile growth with their restrictive zero-Covid policy. The pace of such an adjustment is key to forecasts for the coming year.

Ding Shuang, chief Greater China economist with Standard Chartered Bank, attributed the weaker-than-expected results from Beijing’s stimulus measures this year to coronavirus disruptions, and said that a scientific approach could propel the economy back to previous levels of growth.

However, he warned that the fiscal room will be smaller and will subsequently affect infrastructure spending. China’s augmented budget deficit for January-September reached 6.5 trillion yuan (US$894 billion), compared with 2 trillion yuan in the first nine months of last year.

Mizuho economist Serena Zhou said that concerns about China’s forth-quarter growth look to persist amid the challenging coronavirus policy, persistent property sector weakness and a diminishing growth outlook for developed economies – factors that led to Mizuho lowering its 2022 China GDP forecast to 3.3 per cent from 3.7 per cent.

Another concern is how the new economic line-up deals with exports and efforts to contain China technologically.

Exports could slow, owing to both overseas re-openings and the latest round of US actions to block China’s technological progress. China’s US-bound shipments plunged 11.6 per cent in September, compared with a 3.8 per cent fall in August.

Meanwhile, authorities still need to shore up the confidence of investors, as they contribute heavily to economic growth, revenue and jobs. Steps to do so should be in the pipeline after the recent leadership reshuffle brought new certainty to China and means that economic work will move up the agenda.

The policy priorities of the new economic leadership line-up – including premier-in-waiting Li Qiang and He Lifeng, now chairman of the National Development and Reform Commission – will be seen from the Central Economic Work Conference, an annual meeting that convenes around mid-December to set the tone for the coming year.