From US trade tensions to Beijing's zero-Covid goal, 5 dilemmas facing China's economy

·6 min read

China is likely to switch its focus to supporting economic growth next year after regulatory crackdowns that encompassed property, education, technology and coal use in 2021, analysts say.

The government tightened regulatory oversight this year to reinforce China's socialist credentials ahead of the Communist Party's 2022 national congress, step up efforts to rebalance long-term growth, and respond to growing tensions with the United States.

However, the crackdown has exposed risks to China's growth model, which requires careful management of conflicting goals.

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While there could be more regulatory measures, Larry Hu, chief China economist at Macquarie Capital, believes policymakers are likely to focus on defending a minimum 5 per cent gross domestic product (GDP) growth target next year and avoid making drastic changes that could upset the status quo.

China's economy grew by 4.9 per cent in the third quarter of 2021 compared with a year earlier, down from the 7.9 per cent growth seen in the second quarter.

The nationwide property tax to help address wealth inequality could meet some resistance, while long-standing reforms of the state sector and household registration system, known as the Hukou, will not be a straight forward tasks, analysts say.

"More likely, policymakers would pick areas with less political resistance and lower growth impact. For instance, they could endeavour to make education, health care, elderly care and public housing more accessible to ordinary people," Hu said in a research note on November 19.

Here is a list of issues Beijing may have to balance next year to steady growth.

China's zero Covid-19 strategy and consumption

China's zero tolerance stance on the Covid-19 pandemic has helped it recover strongly from the public health crisis. However, as many countries open to the idea of living with the virus, the costs of maintaining the policy is rising.

Household consumption is likely to be hardest hit, analysts said, particularly in the services sector, as a result of travel restrictions, lockdowns and weak consumer sentiment.

"We expect China's export growth to rapidly decelerate due to a high base, a shift of foreign consumption from durable goods to services as more countries opt for living with Covid, a natural drop in durable goods demand, yuan strength due to limited services imports, and surging producer price index inflation," said Nomura in a report published earlier this month.

Growing pressure on employment

Unemployment among the country's 20-24 year olds with advanced education has been consistently above 20 per cent this year, according to the National Institution for Finance and Development (NFID).

Li Yang, chairman at NFID, said the labour market is suffering from serious imbalances as China pushes to decarbonise its heavy industries, and workers are being laid off. A crackdown on after school tutoring and the property sector could make youth unemployment worse.

Property-related sectors account for about 28 per cent of China's GDP and about 26 per cent of urban employment. Therefore, losses and defaults in the property market pose risks to developers, creditors, banks, local governments and households, according to a report by Moody's published on Thursday.

China's power crisis

High coal prices and low inventory caused one of China's worst ever power crises this year. Many provinces introduced power rationing, leading to blackouts for factories and households.

Beijing responded by boosting coal production and liberalising pricing in the state-controlled electricity market to alleviate financial pressure on coal-power generators.

Premier Li Keqiang later said China was still a developing country and energy demand would increase, meaning "carbon peak and carbon neutrality" targets needed to be pursued in a scientific, step-by-step manner.

China might rely on coal for years to come. Gao Shanwen, chief economist of Essence Securities, said the current strategy of limiting coal production to meet climate goals could increase the risk of economic disruptions because alternative energy sources such as wind, solar and hydropower are unstable.

"In the process of transitioning to new energy, it is necessary to ensure the production capacity of traditional energy is abundant," Gao said.

Power shortages could return in the winter when demand rises again, and the Winter Olympics between February 4-20 next year could also lead to widespread factory shutdowns, Nomura said.

Deleveraging the property sector

A renewed push to reduce debt in the real estate sector this year has put a dampener on China's growth, translating into a reduction in sales and overall house prices.

That could be exacerbated by the roll out of a pilot real estate tax in some regions. The scheme is applicable to residential and non-residential property, as well as land and property owners, but excludes legally-owned rural land and rural residences.

President Xi Jinping has repeatedly said houses are for people to live in, not for speculation, but government measures have so far failed to help meet Xi's objectives, said Li of NFID.

"This has been talked about for many years now," Li said, adding that a property tax alone will not resolve the housing problem.

What was needed was complete reform of the housing market, tax revenues, central government and local government finances, and the banking sector, Li said.

"It's about time we get serious about it. First thing is to maintain stability, withdrawing funds [into the property sector] is not a viable option ... If we don't resolve these issues, the same problems will persist."

US-China trade tensions

China's state-led economic model and industrial policies have been a sore spot in trade relations with the US.

While Beijing has made a bid to join the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), which promotes a level playing field between state-owned enterprises and private competitors, it is unlikely to implement significant changes any time soon.

Oxford Economics said on Thursday China could take more steps to lower import tariffs, ease capital flows, and allow more foreign investment into restricted sectors.

But it will maintain its state-led economic model, despite calls from the US and the European Union towards lower state subsidies, the global forecasting company said.

"Our long-term outlook includes some 'decoupling' and adjustment of supply chains away from China, because of cost cutting, diversification, and geopolitical and security considerations. In particular, we expect the US to continue to restrict China's access to advanced technology," Oxford Economics said.

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 © 2021 South China Morning Post Publishers Ltd. All rights reserved.

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