China GDP growth for 2021 beats expectations, narrowing gap with US, but population crisis, coronavirus cloud economic outlook

·7 min read

China's better-than-expected economic growth last year moves it a step closer to supplanting the United States as the world's No 1 economy, but a tumbling birth rate is adding to a host of recent pressures, including uncertainty from the Omicron variant.

Gross domestic product (GDP) grew by 8.1 per cent last year, narrowly beating most market expectations and the government's target of "above 6 per cent".

But GDP growth in the fourth quarter slowed to 4 per cent year on year, down from 4.9 per cent in the previous three months, hinting at more pain to come in 2022, amid a continued downturn in the property sector and sporadic Covid-19 outbreaks, as well as potential turbulence triggered by the US policy tightening and hostility from Washington.

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China's problems have been further complicated by a worsening demographic picture, as births dropped to 10.6 million last year from 12 million in 2020.

Though the mainland's population increased in 2021 to 1.4126 billion, it grew by a paltry 0.03 per cent, or 480,000, alarming observers.

The falling birth figures will further hamper Beijing's efforts to build a resilient domestic market, which has been plagued by virus disruptions over the past two years. Retail sales grew by only 1.2 per cent from a year earlier in December, down from 3.9 per cent in November. Overall in 2021, retail sales grew by 12.5 per cent.

Analysts have urged policymakers to roll out measures to develop domestic markets and expertise in preparation for escalating rivalry with the US this year, including more technological containment and decoupling attempts, with possible flow on effects for exports.

China's 2021 GDP stood at 114.37 trillion yuan (US$18 trillion) from 101.36 trillion yuan in 2020, accounting for 18 per cent of the global economy, according to the National Bureau of Statistics (NBS).

"The demographic challenge is well known but the speed of population ageing is clearly faster than expected," said Zhang Zhiwei, chief economist at Pinpoint Asset Management

"This suggests China's total population may have reached its peak in 2021. It also indicates China's potential growth is likely slowing faster than expected."

Zhang said consumption in December surprised again on the downside, which likely reflected labour market weakness, while the property sector also continued to weaken.

"We expect [GDP] growth in the first quarter to slow further, and the government will face more pressure to loosen fiscal and monetary policies."

Still, China's economy is closing in on that of the US, which was estimated to have grown by 6 per cent last year by the World Bank.

It was previously thought China's economy would become the world's largest by around 2030, but Yao Yang, dean of Peking University's national school of development, said it could happen between 2028-30, citing China's growth momentum.

The economist said China's GDP would likely be twice the size of the US' by 2049.

"As long as our growth rate exceeds that of the US by 1.5 percentage points, we can achieve this goal," he said at the NETEASE Annual Economist Conference in Beijing last week.

Chinese officials, however, were keen to play down the economic rivalry on Monday.

"We are still the world's largest developing country, with per capita [GDP] less than one fifth of the US and one third of Japan," said Ning Jizhe, head of the NBS.

At December's central economic work conference, officials said China faced "threefold pressure": contraction of demand, supply shocks and weaker expectations.

It is widely believed the government will try to defend GDP growth of at least 5 per cent this year, as economic stability is essential ahead of the Communist Party national congress.

Growth for 2020-21, which was used to reduce coronavirus distortions, was 5.1 per cent, lower than the pre-pandemic level of 6.0 per cent in 2019.

"The hidden gem in these figures is in investment in advanced technology .... This is an arena that has the potential for very high growth," Iris Pang, chief Greater China economist at Dutch financial services firm ING, wrote in a note on Monday.

"A potential landmine is the trade war between the US and China."

China should be wary of fast-evolving international factors for the economy this year, including the endemic pandemic strategy, global inflation, tapering by the US Federal Reserve and China-US tensions, according to research published last Friday by Renmin University of China.

The report warned that friction with the US in trade, technology, finance and other fields could become more frequent and required a variety of countermeasures in advance.

"It is key to restore the economic fundamentals and to consolidate the competitiveness of the domestic industrial chains," said the report, led by Renmin vice-president Liu Yuanchun.

"Before the peak of foreign trade, investment and political friction, it is necessary to expand domestic market demand and quickly normalise market circulation in the current time window."

China's exports rose 29.9 per cent last year, bolstering the GDP growth rate by 1.7 percentage points.

Amid the increasing economic headwinds, China's zero-tolerance approach to the coronavirus pandemic has become the subject of renewed debate by economists.

Eurasia Group, a US-based consultancy, put China's zero-Covid policy at the top of its list of political risks for the year, suggesting a continuation of the policy will backfire for the country and further weigh on the global economy.

Louis Kuijs, head of Asia Economics with Oxford Economics, said downward pressure will persist in 2022, with the property slump expected to continue in the first half of this year.

"In addition, we think that China is unlikely to relax its zero-tolerance approach toward Covid until late-2022 at the earliest. As a result, we project disappointing consumption growth this year, especially in the first half," Kuijs said in a report on Monday.

Beijing has pledged to "front-load" some policies to shore up economic growth this year.

Authorities have quickened the pace of 102 major projects outlined in the 2021-25 development plan and accelerated issuance of local special purpose bonds to fund construction.

The People's Bank of China announced on Monday a cut of its two major policy rates by 10 basis points.

It lowered the lending rate on 700 billion yuan (US$110 billion) worth of one-year medium-term lending loans to 2.85 per cent, from 2.95 per cent. Meanwhile, the seven-day reverse repurchase rate, a major liquidity injection tool, was lowered to 2.1 per cent from 2.2 per cent.

It was the first such policy rate cut since April 2020, when the country was in the throes of the initial coronavirus shock.

Looking ahead, Kuijs said Beijing would unveil more "meaningful" macro easing policies to put a floor under the growth.

"We expect strong infrastructure spending, robust credit growth, and support for the real estate sector this year," he said.

Larry Hu, chief China economist of Macquarie Capital, said the newly released data indicated the economy was still slowing and the 10 basis point cut was not enough.

"The Chinese government has the intention and also ability to ensure a growth of above 5 per cent. It's not an economic, but political issue," he said. "It is just the beginning of an easing cycle."

This article originally appeared in the South China Morning Post (SCMP), the most authoritative voice reporting on China and Asia for more than a century. For more SCMP stories, please explore the SCMP app or visit the SCMP's Facebook and Twitter pages. Copyright © 2022 South China Morning Post Publishers Ltd. All rights reserved.

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