China still struggles with Challenges

AFTER an impressive recovery from Covid-19 back in 2020 and successfully keeping the virus out in 2021, the Chinese economy is once again being challenged by the same threat in 2022.

Plus, the structural drag in the property sector, which contributes around 25% to 30% of gross domestic product (GDP) and is the single-largest sector in China, could be prolonged and further threatening growth in the long term.

Looking back, the Chinese economy posted only one quarter of contraction at 6.9% year-on-year (y-o-y) in the first three months of 2020 (1Q20), and quickly rebounded by 3.1%y-o-y in 2Q20, 4.8% y-o-y in 3Q20, and then a further 6.4% y-o-y in 4Q20.

But this year’s news flow only spells weakness in the economy.

For a start, authorities’ persistency in implementing the harsh zero-covid policy pose deep-reaching downside effects on both businesses and consumers themselves.

Cities including Guangzhou, which is the home to one of the country’s busiest airports Zhengzhou, which has the largest iphone factory, and Chengdu were under lockdown, rendering economic activity to a halt.

New cases

But the highly contagious Omicron variant has challenged the zero-covid policy rule as more cases going up in other provinces. As of Nov 23, 2022, around 44,600 new cases were reported, the highest on record.

According to the data, China posted a mere 0.4% y-o-y GDP growth in 2Q22 and a slight improvement of 3.9% y-o-y during 3Q22.

The first figure showed when the zero-covid policy was implemented in Shanghai during April-may, which has severely disrupted consumptions and productions, while the latter showed some recovery after lockdowns in some cities have been lifted and the rules were revised to be more tolerant.

In our view, unless the rules are eased or even fully lifted, the economy will continue to face headwinds.

The most recent border reopening, specifically for foreign students, can be viewed as a welcoming first step of many to come.

But we think the reopening or the scrapping of the stringent rules will only happen after the domestic political space is on stable footings when the president, premier and senior ministers will be appointed.

This means it will only happen after the National People Congress in March 2023.

But a more troubling challenge is the ongoing property slump which started back in 2021.

The introduction of “Three Red Lines”, which controls developers’ debt level, and “Two Red Lines” to control property-related debt have fundamentally changed China’s property sector.

It started with a series of credit defaults among high-profile developers such as Evergrande, which then turned into a systemic risk spilled over into the whole sector.

Also, the prolonged lockdown has dampened the sales of pre-finished houses and ultimately, crunching developers’ cashflow.

There was a time when home buyers were too frustrated by the failure of getting keys of the houses that they already bought for, and launched a massive strike and stopped paying mortgages, which according to some estimates totalled up to Us$145bil (Rm649.96bil).

According to the data, real estate investment contracted 8.8% y-o-y as of October 2022, down from the peak of 38.3% y-o-y growth back in January 2021.

Rescue plan

The recent 16-point rescue plan announced by Beijing can be considered as an accommodative policies to help buoy the property sector, especially on the supply side, and signals increasing concerns from authorities.

It includes special loans for developers, extension on developer borrowings and additional support for residential project completion.

This is on top of the easing policy for demand side as the key loan prime rates (LPRS) were also reduced for the second time this year; the one-year rate, which influences corporate and household loans, was cut by five basis points (bps) to 3.650%, the lowest in record, while the five-year rate, which affects the pricing of mortgages, was slashed by 15 bps to 4.300%.

Despite the structural challenge of ageing population and falling population growth, we think that the sector will see less painful period over the next coming quarters.

While a rebound is imminent, we do not expect the recovery path to be quick and smooth as the threat from Covid rules are still in the vision.

On the bright side, moving into 2023, we think the Chinese economies are bound to recover by posting 3.5% y-o-y growth after a slower 2.8% y-o-y in 2022.

Keep in mind that this is still sharply lower compared to the historical average of 9% y-o-y (20002019 average).

It will be driven by the consumption component as Covid rule will be heavily revised or even fully lifted.

Labour market

Alongside with that, the labour market is expected to improve as the youth unemployment is projected to trend down from the record high of 19.9% in July and 18.7% in August 2022.

Besides, the consumer confidence will rebound from the record low of minus 87.2 points in September 2022.

However, the downside risk on the growth that we have to be wary of will come from China’s external trade in 2023.

As a global manufacturing hub, it is obvious that the country will feel the effects as the global demand starts to slow following the central banks’ monetary tightening path in reining down their multi-year high inflation.

With the United States starting to show some signs of slowdown and the euro region already heading towards recession, it will no doubt pose a significant impact on China’s exports.

Plus, the easing global supply chain stress could slow the export price inflation.