As China’s economy slows, policymakers look to revive growth
VSHINA A hasn’t had much success in curling, which will be featured at the Beijing Winter Olympics from February 4. But the country’s economic decision-makers could take inspiration from this obscure event. Like curlers, they have a hard target to hit. They are believed to be targeting growth of 5% or more in 2022, despite the threat posed by the arrival of the Omicron variant of covid-19, which has emerged in seven provinces, major cities such as Shanghai and Tianjin, and has was first reported in Beijing on January 15.
The parallels don’t end there. Just as curlers must slide a “rock” (a kind of oversized puck) with enough force to hit the target, but not so hard that it smashes into the ice, Chinese policymakers must strike a balance. They must give a slowing economy enough momentum to grow by 5%, but not so much that it overshoots, contributing to inflation and speculation.
According to figures released on January 17, China GDP grew 8.1% in 2021, its fastest pace since 2011. “Nominal” GDP, which does not take inflation into account, rose even faster: by about 12.6%. And because the Chinese currency has also strengthened, its GDP exceeded $17.7 billion (at market exchange rates), an increase of 20% over the previous year. Judging by these numbers, the economy seems to have all the momentum it needs.
But the pandemic weakened China’s economy so much at the start of 2020 that the following year was always going to look unusually strong by comparison. As 2021 progressed, growth slowed (see Chart 1). Now the economy also has to deal with the Omicron variant. Unlike other countries, China has no intention of “living with” the virus, even though its latest iteration is less severe than previous ones. Rather, it will try to keep the less repressible variant of covid at bay. Mandatory testing in Tianjin, for example, has already forced Toyota to suspend car manufacturing from its joint venture in the city. Volkswagen experienced similar issues.
Meanwhile, Delta has not gone away. A sweeping lockdown has been imposed on the central Chinese city of Xi’an after officials failed to contain an outbreak of the Delta variant quickly enough. Micron, which assembles and tests DRACHMA microchips (used for temporary storage) in the city, said the measures would have “some impact” on production at its plant. Samsung also said it will have to “adjust” production at its flash memory factory, which accounts for about 15% of global capacity. NAND chips, according to TrendForce, a market intelligence firm. (NAND chips are used for permanent storage.)
China’s foreign customers are worried about what would happen if a Xi’an-style lockdown were imposed on a city closer to the heart of the country’s export machine. But optimists point out that China’s export centers are mostly in more prosperous regions with more capable governments. They have more effective contact tracing, which could help target their lockdowns more precisely. After the discovery of Omicron infections in Shanghai, for example, the authorities raised the level of “risk” (which implies tightened movement restrictions) not for the whole city or a whole district, but for areas as well. smaller than a bubble tea shop, where three workers were infected. “Zero-covid has maybe 1,000 faces in 1,000 cities,” says one analyst, depending on the resources each location can devote to the strategy.
The most immediate economic threat posed by Omicron is not to overseas customers but to China’s own consumers. Intermittent restrictions on travel and gatherings hampered retail spending, which rose just 1.7% in nominal terms in December, from a year earlier, and declined, after adjusting for the inflation. Goldman Sachs, a bank, thinks further lockdowns this year could shave a percentage point off household consumption growth. It has revised down its growth forecast for GDP overall from 4.8% to 4.3%, below the government’s target.
China’s recent economic momentum has also been hurt by coal shortages, environmental limits on energy intensity, regulatory crackdowns on consumer-facing tech companies, and tight restrictions on borrowing by real estate developers, who have forced many to default, shaking buyer confidence. In curling, teams frantically sweep debris and other obstacles out of the stone’s path to ease its passage across the ice. In China, policymakers have done the opposite, sweeping away one regulatory hurdle after another in the economy’s path.
What explains this regulatory zeal? After the economy’s rapid rebound from the first wave of the pandemic, Chinese policymakers may have concluded that now is the time to curb some of the negative side effects of growth, such as pollution and property speculation. The economic dynamic seemed assured. Exports in particular have soared as people around the world have spent less on face-to-face services during the pandemic and more on goods to keep them safe (masks), slim (exercise bikes) and sane ( game consoles).
But this external source of growth could diminish in 2022. Foreigners are unlikely to scatter again on the home comforts that have helped them through recent lockdowns. Customers who bought a games console or exercise bike in 2021 probably won’t need an upgrade anytime soon. Moreover, for Chinese exports to increase from their current levels, the madness would have to be increased, not merely repeated.
Somewhat belatedly, policymakers now understood that growth needed to be stabilized. On January 17, the Chinese central bank lowered the interest rate on its one-year loans from 2.95% to 2.85%. This was followed a few days later by a cut in benchmark bank lending rates. The cuts follow a cut last month in reserve requirements for banks.
The government is also easing fiscal policy. It extended tax breaks, including favorable treatment for year-end bonuses. It encourages local governments to issue more “special” bonds (which are supposed to be repaid out of revenues from the infrastructure projects they finance). It is also accelerating the construction of 102 infrastructure “mega-projects” outlined in the country’s five-year plan for 2021-25. China’s public grid will, for example, build 13 extra-high-voltage transmission lines in 2022. Increased infrastructure investment could add at least a percentage point to GDP growth in the first half of 2022, according to Morgan Stanley, a bank.
Morgan Stanley analysts are relatively confident the government’s chances of hitting its growth target this year, as long as policymakers force a soft landing in the property market. Home sales fell nearly 18% in December from a year earlier. To halt this trend, government officials have scrambled to reassure homebuyers that the apartments they pre-purchased will be built, even if the developer who sold them goes bankrupt. Mortgage rates are down slightly. And a number of cities have experimented with subsidies and tax reductions to encourage home buying. Rosealea Yao of Gavekal Dragonomics, a consulting firm, believes sales will improve in the first quarter compared to the previous three months.
But although China’s national leaders are now determined to stabilize the economy, they are still wary of the overstimulation in real estate, which is prone to worrying speculative bubbles. Beijing wants local governments to do enough, but not too much. After the northern province of Heilongjiang promised an “all-out sprint” to revive the property market, the exhortation was quickly taken down from the internet, Ms Yao said. The measured art of curling, not sprinting, is the best metaphor for government goals. ■
Correction (January 28, 2022): A previous version of this piece referred to curling sweepers as “skaters”. In fact, they don’t wear skates.
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This article appeared in the Finance and Economics section of the print edition under the title “Omicronic pain”