China faces tough years ahead for growth

A woman walks at Evergrande city plaza, next to its apartment buildings, in Beijing, China, Sept. 22, 2021. The government is facilitating financing for the country's troubled developers, after foreign investors cut off funding amid rising defaults, but uncertainty prevails over the sector this year. EPA-Yonhap

Major countries set to be hit by No. 2 economy's slowdown

By Kim Bo-eun

HONG KONG ― The Chinese economy is facing a slowdown in 2022 due to the aftermath of government regulatory policies and structural challenges amid the unrelenting spread of the COVID-19 pandemic, experts said Friday. China made a rebound in 2021, with its economy growing 8.1 percent from the previous year, backed by the base effect.

China's GDP growth rate has steadily fallen over the last decade, from 10.6 percent in 2010, to 6 percent in 2019 prior to the pandemic. This drop is attributed to structural problems, including declining productivity, as the country's population ages.

But this year, China faces additional headwinds, such as woes arising from the coronavirus and the real estate sector. The International Monetary Fund last month slashed its growth forecast for the economy to 4.8 percent from an earlier projection of 5.6 percent, citing these factors. Investment bank Goldman Sachs earlier cut its forecast to 4.3 percent from 4.8 percent, on similar grounds.

China is projected to take on the costs of its zero-COVID approach, which has extended into the new year. This situation is set to take a toll on household consumption, as strict, large-scale lockdowns force spenders to stay in their homes and seal off neighborhoods.

Household consumption accounted for 39 percent of the GDP in 2020, which compares with the figure of 55 percent and above for other major economies, according to data from S&P Global Ratings. China is increasingly turning inward to its middle-class consumer base for growth momentum, as it seeks to reduce dependency on growth based on investments and exports from external demand.

"The key factors in our GDP growth forecast include COVID-19's impact on domestic demand, as well as overseas demand; the tightness of the supply chain, such as via high freight costs and the shortage of semiconductor chips," Iris Pang, ING's chief economist for Greater China, said in an email.

The entrance to a housing complex in the city of Zhangye in Gansu Province has been barred, in this photo taken Oct. 31, 2021, amid the sealing off of areas in order to contain the spread of the coronavirus. AFP-Yonhap

Adding to the burden is the country's heavily leveraged property sector, which has seen rising defaults following Evergrande's crisis.

The government has begun easing regulations to enable financing for developers, who have seen investors cutting off funding amid defaults. But a downturn in the market means that there will be fewer investments in the sector, which has been one of the main forces behind China's robust growth.

Pang said, "The property market is now undergoing massive M&As, and the main potential buyers should be state-owned developers." She noted infrastructure projects scheduled to kick off this year would offer the construction sector some support.

China is set to do what it can to defend its growth.

"We expect proactive fiscal policies, such as building more infrastructure projects and loosening monetary policies through cutting interest rates, to support the economy," the ING economist said.

"There is a very high degree of uncertainty around China's growth in 2022," Daniel Rosen, a partner at New York-based research provider Rhodium Group and a China analyst, said via email. "Fundamentals point to growth this year of only 2 to 3 percent; but authorities are attempting extraordinary support for growth, and will probably report growth between 4 and 5 percent for the year."

China's longer-term slowdown, in the meantime, is bad news for other major economies. The manufacturing powerhouse has been the engine behind global growth for the past few decades. It accounts for around 15 percent of global trade.

"A slowing Chinese economy will negatively impact many economies that have remained dependent on China for export growth, such as Germany and South Korea," Rosen said. "A slowing China means greater capital flows to the U.S. and Europe as well."

China facing need for fundamental shift

The World Bank stated in a recent report that China's high growth based on resource-intensive manufacturing, exports and low-paid labor has largely reached its limits. "Over the past few years, growth has moderated in the face of structural constraints, including declining labor force growth, diminishing returns to investment, and slowing productivity," the report said.

Data shows that people aged 60 and older accounted for 17.4 percent of China's population in 2020, up from 10 percent in 2000. An aging population means the country's vast labor force is shrinking.

Some experts point to the need for the government to reduce its role and leave matters to the market, to spur innovation and growth.

"China's slowdown is structural, and the result of middle-income status economic challenges, as well as the limits of debt- and property-driven growth," Rosen said.

"These problems will take considerable time to solve, and only a very clear signal of turning away from political intervention and back toward private market forces can restore China's potential," he continued.