Box 9. The simulated regional impact of China’s property market downturn and Zero-CoViD policy

Box 9. The simulated regional impact of China’s property market downturn and Zero-COVID policy

Economic developments in China can have meaningful spillovers onto activity in the broader EAP region. These spillovers can be simulated using a global macroeconomic projection model.

Methodology. The scenarios are developed using the oxford Global Economic Model (oEM). The oEM is a semistructural projection model that balances theoretical properties, empirical fit, and forecasting performance (oxford Economics 2019). it features over 80 explicitly modeled country blocks, many of which are available at the quarterly frequency.3

China’s Property Market Downturn Growth in China’s property investment is expected to decline from a recent peak of 11.2 percent year-on-year in 2021Q1 to −8.3 percent in 2022Q1.4 The model quantifies the domestic, regional, and global effects of this slowdown by simulating a shock to China’s residential investment of a similar magnitude and duration.

The model simulation matches the sharp decline in residential investment over the course of 2021 and projects a sluggish recovery over 2022. in this simulation, residential investment would decrease by an average of 5 percent per year in 2021 and 2022 compared to an alternative scenario without a property market downturn.5 The shock would have a small impact on private consumption due to its limited effect on the level of personal disposable income. As a result, the overall impact on output growth would be relatively muted, amounting to an estimated 0.6 percentage point in 2022 compared to the alternative scenario of robust growth in residential investment (figure B9.1A). But the impact on Chinese imports would be more pronounced, in part due to the property market’s elevated commodity intensity. The resulting decline in global commodity demand would lower global commodity prices.

The region’s economies would be affected via several channels. first, the decline in China’s import demand, coupled with a deterioration in competitiveness caused by the depreciation of the Yuan, would lower trading partner exports. Second, the decline in commodity prices induced by the contraction in residential investment would further weigh on activity in the region’s commodity-exporting economies. Third, the fall in China’s equity prices would weigh on investor risk appetite across the region, contributing to a mild downturn in equity markets in several neighboring countries. overall, growth in developing EAP excluding China would be reduced by 0.3 percentage points in 2022 (figure B9.1B). The heterogenous impact across EAP countries reflects differences in their exposure to developments in China.

3 The model exhibits “Keynesian” features such as sticky prices in the short run, and neoclassical properties in the long run, such that prices adjust fully and the equilibrium is determined by supply factors. Countries are assumed to be small open economies, in the sense that exports are determined by aggregate demand and a country cannot ultimately determine its terms of trade. Consequently, exports are a function of world demand and real exchange rates. 4 oxford Economics estimates as of March 2022. 5 in the alternative “no property market downturn” scenario, residential investment growth in China is assumed to remain at its recent 5-year quarterly average of about 9 percent (y/y).

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