China’s battle to stabilize its economy

China’s efforts to stabilize economic growth are facing new bumps, upsetting an already fragile recovery.

The current wave of Covid-19 outbreaks – the worst since early 2020 – has infected more than 50,000 people across the country, and measures to contain the virus’ spread have led to city lockdowns, halted production at some factories and squeezed the tourism and food sectors. The impact on Chinese GDP growth in the first quarter could be a drop of 0.3 to 0.8 percentage points, according to some analysts.

Promising economic data for the first two months of 2022 is also nothing to celebrate, as many analysts said the forecast is bleaker than it looks and that economic activity could slow in March.

At the national legislature meeting in early March, China announced that it expects GDP growth this year “around 5.5%”, a target that many economists say is challenging. The world’s second-largest economy faces what policymakers are calling “triple pressures” — reduced demand, supply disruption and weakening expectations — and they have stressed the need to stabilize economic growth.

All eyes are on the central government to see what its next measure to sustain growth will be.

Numbers and challenges

The Chinese economy appears to have got off to a strong start in 2022. January-February data released by the National Bureau of Statistics presented a promising picture of recovery after national GDP growth dropped to 4% per year in the fourth quarter of 2021.

Despite strong data from January and February, “China is expected to experience a sharp slowdown in March” because of the latest Covid-19 outbreaks and the country’s adherence to the “Zero Covid” principle, economists at Macquarie Capital said in a published note. in the beginning of the month.

Weak demand is still weighing on consumer spending, and the impact of Covid-19 on the services sector remains a drag, experts said at an economic meeting on March 14.

In addition to the Covid outbreaks in the country and the rise in commodity prices caused by the war in Ukraine, the depression in the real estate sector, an engine of the Chinese economy, is also weighing on growth.

China is preparing for up to 16 million new applicants for urban jobs in 2022, the most in several years, Premier Li Keqiang told a news conference after the “Two Sessions” concluded. Tightening of policies in sectors such as private education and internet platforms has impacted the ability of some companies to hire, according to some analysts. Stabilizing economic growth will be key to creating enough jobs to meet this demand.

To enhance economic development, China has been launching new policies and measures. In the first few months of 2022, local governments accelerated the issuance of special purpose bonds (SPBs), a key source of funding for infrastructure investments. Beijing has also promised more tax cuts for businesses, postponed plans to expand a pilot property tax program and is gradually easing restrictions on the property market. Meanwhile, policymakers have rolled out measures in support of various industries, including the service sector, to cushion the impact of the pandemic.

supporting companies

At a meeting chaired by Premier Li last week, the State Council, China’s cabinet minister, pledged to deliver nearly 1 trillion yuan in tax refunds to small and micro-enterprises and individual business owners. . Additional transfer payments of 1.2 trillion yuan will be allocated to local governments to support their efforts to implement tax refunds and tax and fee cuts, as well as secure employment, according to the meeting.

For years, tax and fee cuts have been part of China’s toolkit to support businesses. From 2016 to 2021, the country reduced tax and fee burdens by an estimated 8.6 trillion yuan, Vice Economy Minister Xu Hongcai said in an interview last month.

According to the government’s annual work report that Li presented to the upper legislature earlier this month, tax refunds and cuts totaling a record 2.5 trillion yuan this year are expected to ease the financial strain on businesses — particularly small and medium-sized businesses. size – in sectors including manufacturing, research and technical services, environmental protection, electricity, gas and transport.

A survey of companies’ production costs by the Chinese Academy of Fiscal Sciences, a government-funded think tank, shows that despite tax and fee cuts, most companies still had to struggle with high costs in 2021. pandemic and other sources of uncertainty could increase their production costs, according to the research report, which was published in February.

“The secret is to stabilize the expectations of companies so that they do not lose hope,” a source close to policymakers told Caixin in February. Compared to short-term political support during an economic downturn, it is more important to alleviate business concerns through concrete actions such as reforms, he said. He added that it is important to provide companies with a transition period to facilitate adaptation to new regulatory policies.

Over the past two years, China has issued a series of measures to tighten regulation of the internet, private education and real estate sectors, as well as overseas IPOs, putting pressure on related companies.

Whether China will relax its zero Covid policy is another factor that could profoundly impact business. From March 1 to 24, more than 50,000 people in 28 of mainland’s 31 provincial-level regions were infected in the latest wave of Covid-19, which has grown rapidly in recent weeks.

Some cities have taken strict measures to end the virus. Shenzhen, the southern industrial hub, has blocked residential communities and industrial parks and suspended public transport for a week. Shanghai also entered a two-phase lockdown earlier this week.

The outbreaks are affecting construction and freight transport as well as the service sector, some analysts said.

The impact of Covid on China’s first-quarter GDP growth could be a loss of 0.3 to 0.7 percentage point, analysts at CICC (China International Capital Corp.) said in a March 20 research note. A report by Hua Chuang Securities predicted a larger loss of 0.8 percentage points.

China has acted to adjust its Covid control policies so that they affect the economy less. In early March, the National Health Commission revised its Covid-19 response protocol with major changes to diagnostic criteria, treatment and quarantine requirements. The review was done to address the growing outbreaks of the omicron variant and indicates a step towards more lenient controls, experts said.

At a March 17 meeting, President Xi Jinping called for better measures to maximize effectiveness in controlling the outbreak at the lowest cost while minimizing the impact on society and the economy.

Job

While China’s 2022 GDP growth target is lower than last year’s “above 6%,” it has raised the employment target. The objective is to keep the surveyed urban unemployment rate below 5.5%. This is more ambitious than last year’s target of “about 5.5%”. This year’s government work report highlighted the objective of stabilizing businesses to preserve employment.

Some 10.8 million new graduates – 1.7 million more than last year – will look for jobs in 2022, and turning them into a workforce will be a top priority for policymakers, said Zhong Zhengsheng, chief economist at Ping An Securities, in an article published earlier this month. Zhong warned that services, real estate, tutoring and the internet – among other areas of the economy – could become weaker in job creation because of the pandemic and regulatory tightening.

In this year’s work report, the government pledged to widen employment channels, stabilize market entities and allow startups to play an important role in enhancing employment growth. He also said that the policies will have greater weight to help companies in the retail, tourism, transport, food and hospitality sectors, which have high employment capacity.

government investment

For 2022, the central government has earmarked 3.65 trillion yuan (R$ 2.74 trillion) in SPBs, which mainly finance infrastructure projects, the same as last year. Combined with the remaining money raised from SPBs over the past year, the actual funds available from these bonds could be greater than that number, economists said. Profits handed over by state institutions, such as the central bank’s 1 trillion yuan, to the country’s Ministry of Economy will also contribute to funds transferred to local governments. With fuller coffers, local governments will be more comfortable financing infrastructure investments.

The government urged cities to make “proactive investments” in infrastructure such as transportation, energy, urban pipelines and major water conservation projects.

Wang Tao, head of China economic research at UBS Investment Bank, estimated that infrastructure investment growth this year could reach 5% to 6%, a jump from last year’s steady growth rate.

The central government has been pushing ahead with this year’s SPB quotas to boost spending on local infrastructure, but some analysts said it was too early to say how much the measure will boost growth.

A CICC survey of building materials companies showed that there has not been a sharp increase in demand for infrastructure and that it may take time for policies and funding to take effect.

Real estate market gains strength

China’s property market boomed in the first half of 2021 before slumping as regulatory restrictions on borrowing left developers struggling to pay their debts. Market prospects are still uncertain in 2022. In February, a key indicator of home mortgages fell for the first time in at least 15 years, and sales by the top 100 homebuilders fell by nearly half year on year. At a press conference in March, a top banking regulator said the trend of a housing bubble had essentially been reversed and the government did not want to see any drastic adjustments that could hurt the economy.

The government work report said the country would act to stabilize land and housing prices along with market expectations. Policymakers are also committed to accelerating long-term rental market development and affordable housing construction, according to the report. He emphasized that specific policies are needed for each city to ensure stable development in the long term. Previous restrictions are being relaxed, and changes in housing policies are taking place at the local level.

On March 16, in a move that was seen as a way to stabilize investor expectations, China announced that it would delay an expansion of the pilot property tax program this year. The planned reform could strain local real estate markets and increase liquidity pressure on developers. Several regulatory departments have pledged to neutralize risks in the real estate sector or support the industry.

This is generally positive credit for rated developers, although default risks remain because it will take time for policies to take effect and improve market sentiment, Moody’s Investors Service said in a March report.

(Ma Chengyao, Fan Qianchan and Cheng Siwei collaborated)

Translated by Luiz Roberto M. Gonçalves