When I first heard a Moody's economist discuss the cooling Chinese economy late last year, it caught my interest but not much. As we have been living with a pandemic for two years, an economic slowdown seems unavoidable, even in the country that has been the world's engine of growth for years.
But recently, the gloomy economic picture in China has become the most talked about topic. Government data showed the economy expanded last year by 8.1%, helped by robust exports and strong Covid recovery. But most of that growth came in the first half, before a series of second-half shocks including regulatory crackdowns, a cascading property market slump and new virus outbreaks that brought tough lockdowns.
According to the National Bureau of Statistics (NBS), growth sank to 4.9% in the third quarter and the 18-month-low of 4% in the fourth quarter. While Chinese exports have been surging, weak domestic consumption has clouded the outlook. Retail sales in December rose just 1.7% from a year earlier, the slowest pace since August 2020.
"At present, the downward pressure on China's economy is still relatively big, and growth of residents' employment and income is restricted," NBS head Ning Jizhe said.
The International Monetary Fund (IMF) forecasts 5.6% GDP expansion for China this year. That's more optimistic than the Goldman Sachs forecast of 4.3%, while the government is expected to set a target of 5%.
Other experts also see dim prospects for growth, as the zero-Covid policy continues to place strict controls on people's movements at the slightest sign of a coronavirus outbreak. Many cities are on high alert ahead of the Lunar New Year travel season, and the Omicron variant has now been reported in Beijing.
China understandably cannot easily shift its pandemic strategy, since doing so would be a major political decision.
Meanwhile, abrupt government policy moves have caused serious repercussions for the private sector, from big conglomerates down to microbusinesses. They have sent a particular chill through the real estate sector, which continues to face a slump in housing sales, triggering defaults at some heavily indebted companies.
Tech companies such as Alibaba, as well as the video game and education industries, remain under tight state restrictions. A ban on for-profit tutoring in core subjects put countless instructors out of work, contributing to a worsening job market.
Besides the gloomy short-term outlook, longer-term concerns have also emerged. New NBS data showed the birth rate in 2021 dropped faster than expected to a record low of 7.52 per 1,000 people. The population will soon start to shrink, while a rapidly ageing population will drive up social spending.
Another threat to growth is international relations with key trading partners. Besides the simmering trade war with the US, Beijing's ties with the European Union (EU) are also fraying due to growing tensions over human rights and supply chain security. The pandemic may have resulted in booming export growth of 21.2%, but a loss of market share looks possible in the long term as trading partners cut their economic dependence on the mainland.
However, the top Chinese leadership is unlikely to tolerate a sharp downturn that could lead to significant job losses. That could undermine the stability of the current regime as well as have adverse consequences for the global economy.
Economic stability is an urgent priority ahead of the once-every-five-years Communist Party congress this fall. To this end, Beijing should closely examine the state of the stagnating economy and the policies that brought it to this point.
To maintain economic vitality, moves to revive the private sector seem inevitable. An approach that holds back private industry and allows only state-owned enterprises to prosper will lead to a dead end. The easiest solution is to suspend or indefinitely delay policies and regulatory actions that may be perceived as harmful to the business community.
Equally important to regulatory clarity at home in restoring business confidence is improving China's relations with major trading partners. The foreign policy priority should be to soften, or at least not escalate tensions with the US, the EU and Japan.
That could include suspension of provocative activities in the Taiwan Strait and the South China Sea, or suspending prosecution of Hong Kong activists under the China-imposed national security law.
The first quarter is a window of opportunity. As public frustration grows, forward-looking and fine-tuned policies to curb downside risks are critical as uncertainties about China's economic outlook deepen.