China: Slowing growth and turbulences on the property market

China: Slowing growth and turbulences on the property market

Chinese economic growth is slowing down again. While China’s GDP grew by 8.1 percent in the year as a whole, growth slowed down to only four percent year on year in the fourth quarter 2021. Tighter lending standards curbed high-growth sectors in particular. Disruptions to supply chains and in energy supply have increased costs and put further pressure on China’s producers. On account of weak domestic demand, rising producer prices can only be passed on to domestic consumers to a limited extent. Despite increasing input costs and disruptions to supply chains, the export sector is still the dominant engine of growth of the Chinese economy. This could soon change if global competitive pressure increases further. China is expected to grow by slightly more than five percent in 2022.

Credit growth curbs activity

The Chinese leadership is again focussing more on reducing debt and the dependency of the economy on debt-financed growth. In September, new domestic loans amounted to around 29.7 billion U.S. dollars (191.2 trillion renminbi) which represents a year-on-year increase of only 11.7 percent, the lowest growth in domestic credit for over ten years. This puts a strain on the economic activity of the property and industrial sector in particular. Especially smaller private companies are finding it more difficult to finance themselves.

Property sector in an adjustment crisis

The growth rates in the property and construction sector dropped further in 2021. The slowdown in the increase in private household income and the uncertainty of the impact of China’s regulatory interventions in the property sector have curbed consumer demand for residential property. The sold floor space in commercial properties amounted to almost 1.8 billion square metres, which corresponds to an increase of only 1.9 percent. Total sales of commercial properties amounted to almost 18.2 trillion yuan, which is an increase of 4.8 percent. The lull in sales presents a problem for Chinese property developers as they then have difficulty in accessing the fresh cash needed to meet the regulatory requirements introduced in late 2020. Media attention has zoomed in on property giant Evergrande, indebted by over 300 billion U.S. dollars, after its default on the final date for interest payments on foreign bonds to the sum of 82.5 million U.S. dollars, making it factually insolvent.

Infrastructure investment very low

Investment in infrastructure remains restrained as local governments are faced with low tax revenues and attempts by the central Chinese government to contain the growth in local government debt. Capital investment in infrastructure continued to slow down in 2021 and finished off the year at only 0.4 percent above last year’s level. The drop in infrastructure investment was particularly pronounced in the structurally weak western provinces of China, further increasing the economic cleft between the more advanced eastern provinces.

Industrial production: Upward trend subsiding

The growth of the Chinese industrial sector has also slowed down although industrial value added was still 9.6 percent higher in 2021 than in the previous year. The export-oriented manufacturing sector, in particular, is still expanding to meet demand from abroad. The slower pace of growth in heavy industries and the automotive sector is nonetheless putting the Chinese economy under strain, with

temporary energy shortages and the caps on energy-intensive production ordered by the government exacerbating the slowdown. Looking at the individual product groups, the production of electric vehicles (up 145.6 percent), industrial robots (up 44.9 percent), integrated circuits (up 33.3 percent) and microcomputers (up 22.3 percent) recorded particularly high growth.

Exports and direct investment still high

In 2021, China’s foreign trade increased by a robust 21.4 percent, with exports climbing 21.2 percent and imports 21.5 percent. High export activity was one of the main pillars of the Chinese economy in 2021. The trade surplus in 2021 stood at 688 billion U.S. dollars. While rising prices of commodities and intermediates contributed to increasing the value of imports and exports, Chinese exports were able to benefit from the sustained disruptions in global industrial production and expand their market shares. In 2020, China had thus already overtaken Germany as the leading worldwide exporter in mechanical engineering. However, the contribution of exports to Chinese economic growth is set to drop considerably in the course of 2022 as soon as other export-oriented countries recover and step up competition on the international markets again.

The situation was similar with foreign direct investment (FDI). The Chinese economy seemed comparatively stable compared to other markets and thus attracted more foreign direct investment flows. Up to November 2021, China had recorded FDI to the sum of 157 billion U.S. dollars which represents an increase of 15.9 percent compared to the same period the previous year. Here too, growth is likely to flatten out once the global economy revs up again.

Services still weak on account of Covid

China’s service sector managed to grow another 8.2 percent in 2021 but is set to slow down again. New restrictions imposed to contain the spread of Covid-19 will further curb spending on tourism, particularly during the upcoming holiday period around the Chinese New Year and during the Olympic Winter Games in February 2022. The travel restrictions continue to affect tourism in some southern and western regions, in particular. Last year, spending on hotels and restaurants also dropped on account of Covid-related restrictions. In the service sector, employment and the growth of household income decreased overall.

Private household incomes and consumption only rise moderately

Disposable per capita income grew by 9.1 percent in 2021. Real growth following price adjustment increased 8.1 percent. In view of the weaker growth in household incomes and the fact that Chinese consumers are more inclined to save on account of the persistent economic insecurity, consumption levels in the Chinese economy remained weak. Retail sales, which is a key indicator for consumption, was still at 12.5 percent higher than the previous year. However, in December, total sales of consumer goods were only 1.7 percent higher than in December 2020. Although online retail sales continued to grow, expanding 14.1 percent in 2021, this is lower than the average growth over the previous years. One factor curbing consumption is the fragile situation on the labour market. Official national statistics on this highly politically sensitive issue are not very reliable. According to official figures, urban unemployment across the country was at 5.1 percent in November 2021. However, we can assume that the labour market has not been left unscathed, particularly by the abrupt regulatory interventions in online platforms, the politically motivated and abrupt crackdown on the private education sector with an estimated workforce of ten million, and the crisis in the property sector. Indications of the

consequences are revealed in the local statistics: the number of individuals on unemployment benefits in Shanghai, which averaged 100,000 between 2013 and 2019, had multiplied more than sixfold to over 650,000 by the third quarter of 2021.

China’s central bank hold reins tight

China’s central bank is focussed on supporting the sluggish rate of growth without lowering its efforts to reduce debt or stoking concerns of inflation. While central bank officials had advocated combating inflationary pressure and normalising monetary policy in the wake of the outbreak of Covid in China, the People’s Bank of China (PBoC) first took several expansionary measures such as reducing the minimum reserve rate in July and December and large-scale liquidity injections in October. In its efforts to contain inflationary pressure, the PBOC had not cut key interest rates for corporate and household loans since spring 2020 even though investment in high-growth sectors had dropped substantially. Only in the second half of December 2021 did the central bank cut the one-year loan prime rate (LPR) by five base points to 3.80 percent. The five-year LPR remained unchanged. At the start of 2022, the key interest rate was again cut by a marginal 0.1 percent. Ultimately, the approach of the PBOC of increasing liquidity primarily through cutting the minimum reserve rates and avoiding reducing the key interest rates is aimed at mitigating short-term economic problems while avoiding broad monetary expansion. This does not mean that the interest rate cuts at the turn of the year are not the first steps towards further interest rate cuts in the course of 2022.

Moderate increase in consumer prices and dynamic producer prices

The divide between rising producer prices and the slowing growth of consumer prices reached record levels towards the end of 2021, exacerbating the cost pressure on Chinese producers. The Chinese Producer Price Index (PPI), which measures the growth rate of input prices for domestic companies in China, has risen sharply since May 2020. This also reflects the globally increasing commodity prices and increased transport costs. Further factors fuelling prices are the additional costs of supply chain disruptions caused by electricity outages and state-imposed reductions in the production of energyintensive input goods such as steel and concrete.

According to figures from the Chinese Statistical Office, the Chinese Producer Price Index increased by 8.1 percent in 2021 year on year while consumer prices only rose 0.9 percent in the same period. Rising export prices indicate that the producers of export-oriented industries have started to transfer these rising costs to foreign markets thus contributing to global inflationary pressure. On account of the weak domestic demand, Chinese producers have so far avoided passing on these higher prices to domestic consumers keeping consumer price inflation low.

Outlook for 2022: Moderate growth

China’s economy fared better through the crisis year 2020 than most other major economies and returned to high economic growth in 2021. However, as the last quarter 2021 was relatively weak the outlook for 2022 is mixed. Pressing down on the economy at the end of the year were not just economic factors but also tough regulatory interventions, above all in the high-tech sector and in the overheated property market. The large and, in part, systematically important property developers such as Evergrande and Kaisa have been under financial pressure for months. The Central Economic Work Conference of the Chinese government in December 2021 was thus focussed largely on stability. A new wave of large economic stimuli is not on the cards, but great restraint is likely to be exercised