IN 1978, China began to reform and open up its economy. By 2010, it has overtaken Japan as the second largest economy in the world. The gross domestic product (GDP) growth has averaged more than 8% per annum, lifting over 700 million people out of poverty. China is now an upper middle-income country considering the significant improvements in access to health, education and other services over the last 20 years.
When Covid-19 first hit China, it did not take long for the government to come up with a plan to curb the pandemic. Dubbed the “zero-Covid” policy, severe restrictions were imposed to combat the virus. Targeted lockdowns and mass testing of entire cities were carried out and travel restrictions were imposed. The resumption of economic activity had prioritised low-risk regions and essential sectors.
To complement the containment policy, policymakers also provided targeted financial relief and fiscal support such as repayment moratorium and relending facilities to affected firms and maintained the financial market’s stability using liquidity provision to the banking system. Its central bank, the People’s Bank of China (PBoC) has lowered various policy rates for corporate lending.
In addition, the PBoC has set out a variety of non-interest rate instruments as an extra support for micro and small-sized enterprises.
It is undeniable that we can attribute the country’s success, in mitigating the pandemic effects and getting the economy back to its feet, to all these measures as other countries are suffering from surging cases and the prolonged economic disruption of lockdowns. Regions across the world — from Asia-Pacific, Europe to the Americas— are experiencing a sharp increase in Covid-19 cases at the same time. According to a report by Kearney, by the middle of March 2020, the manufacturing sector was expected to be fully operating at 80% capacity.
According to data, China’s GDP contracted by 6.8% year-on-year during the first quarter of 2020: the first contraction in more than 40 years, and quickly recovered to 3.2% growth during the next quarter. Another country that can mirror the same achievement is Turkey albeit a contraction in the second quarter. On the other hand, most countries failed to replicate those achievements. The US economy faced three consecutive quarters of recession before landing at barely above growth region at 0.3% year-on-year in the first quarter of 2021 while the UK had to live through five declining quarters.
Challenges in 2021
After robust containment efforts, the Chinese vaccination campaign resulted in a majority of the Chinese citizen being fully immunised at 1.1 billion people, according to available data. However, just like in other countries, the Delta variant posed significant threat to the economy.
Due to its violent and contagious nature, the variant has caused countries to face steepening new daily Covid cases. Upholding the “zero-Covid” policy, China’s recovery momentum slowed, influenced by the recurrent pandemic outbreaks and targeted regional lockdown measures. Added with regulatory crackdown, largely aimed at the tech sector, supply chain disruptions, power outages and turmoil in highly-leveraged property sector, the momentum has been dampened.
The economic growth from July to September 2021 was at only 4.9% year-on-year the slowest in 12 months. Recently, the economic challenges were further amplified by the pandemic uncertainty through the emergence of Omicron which was found to be more transmissible than Delta, albeit showing “extremely” mild symptoms, according to some experts.
Moving into 2022
China’s leaders are scheduled to assemble this week to decide 2022’s economic agenda during the central economic work conference. Based on the shift of tone during the Politburo meeting on Monday towards economic and financial stability while prioritising prudence, from last year’s “anti-monopoly rules” and avoiding unstable capital expansion, we expect the focus this time is to support growth in the wake of a slowing economy. The annual meeting will be attended by members of the Politburo Standing Committee, including President Xi Jinping.
Among the areas of focus, the property sector, which has been the key driver of growth in China all these years, should be one of them. We expect authorities will dial down the scrutiny imposed on the sector as the issue of ongoing highly-leveraged developers continued to weigh on the economy. But we remain “neutral” on the China’s regulatory crackdown on overall business sectors. We expect the government to continue scrutinising business sectors while accommodating the economic growth and holding “common prosperity” at the core.
Another focus of the meeting will likely be on macro policies. We need to see how far China will go to loosen monetary and fiscal policies to boost the economy, after the central bank injected US$188bil (RM792bil) of liquidity into the financial markets by cutting the reserve requirement ratio (RRR) by 50bps. This is the second time the central bank has cut the RRR this year. After credit expansion slowed significantly while the fiscal policy has been tight this year, any indication of an accelerated government spending will be positively applauded. But the easing monetary and fiscal policy should not be deployed too easily considering the US Federal Reserve has started to tighten its policy, creating policy divergences between the two biggest economies.
If all the areas of focus mentioned above are finetuned to be accommodative as a whole, we project China’s GDP to reach 5% to 6% in 2022, on the back of dissipating low base. For 2021, the growth should hover around 6.5% to 7.5% in 2021, weighed by the property slump, power crisis, and slower consumer demand but being offset by the healthy exports, which reached record high of US$325bil (RM1.37 trillion) in November 2021, and supports from PBoC. This is lower than the International Monetary Fund’s forecast of 5.6% in 2022 and 8.0% in 2021.
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