China’s economy is slowing, a worrying sign for the world
BEIJING – Construction and real estate sales have fallen. Small businesses have closed due to rising costs and weak sales. Local authorities in debt reduce the salaries of civil servants.
China’s economy slowed markedly in the final months of last year as government measures to curb property speculation also hurt other sectors. Lockdowns and travel restrictions to contain the coronavirus have also weighed on consumer spending. Strict regulations on everything from internet businesses to after-school tutoring businesses have sparked a wave of layoffs.
China’s National Bureau of Statistics said Monday that economic output from October to December was only 4% higher than the same period a year earlier. This represented a further deceleration from the 4.9% growth in the third quarter, from July to September.
Global demand for consumer electronics, furniture and other home comforts during the pandemic has produced record exports for China, preventing its growth from stalling. For the whole of last year, China’s economic output was 8.1 percent higher than in 2020, the government said. But much of the growth took place in the first half of last year.
The snapshot of the Chinese economy, the main engine of global growth in recent years, reinforces expectations that the global economic outlook is beginning to darken. Worse still, the Omicron variant of the coronavirus is now beginning to spread in China, leading to more restrictions across the country and raising fears of further disruption to supply chains.
The slowing economy poses a dilemma for Chinese leaders. The measures they have imposed to tackle income inequality and curb businesses are part of a long-term plan to protect the economy and national security. But officials fear they could cause near-term economic instability, especially in a year of unusual political importance.
Next month, China will host the Winter Olympics in Beijing, which will draw international attention to the country’s performance. In the fall, Xi Jinping, the Chinese leader, is expected to seek a third five-year term at a Communist Party congress.
With slowing growth in his country, slowing demand and debt still at near-record levels, Mr. Xi could face some of the biggest economic challenges since Deng Xiaoping began to pull the country out of his Maoist straightjacket four decades ago.
“I fear that the operation and development of China’s economy in the coming years will be relatively difficult,” Li Daokui, a prominent economist and adviser to the Chinese government, said in a speech late last month. “Looking at the five years as a whole, this is perhaps the most difficult period since our reform and opening up 40 years ago.”
China also faces the problem of rapid aging, which could create an even greater burden on the Chinese economy and its workforce. The National Bureau of Statistics said on Monday that China’s birth rate had fallen sharply in the past year and was now barely higher than the death rate.
Private sector struggles
As the costs of many raw materials have risen and the pandemic has prompted some consumers to stay home, millions of private businesses have collapsed, most of them small and family-owned.
This is a big concern because private companies are the backbone of China’s economy, accounting for three-fifths of output and four-fifths of urban employment.
Kang Shiqing invested much of her savings nearly three years ago to open a women’s clothing store in Nanping, a river town in southeast China’s Fujian Province. But when the pandemic hit a year later, customer numbers dropped drastically and never recovered.
As in many countries, there has been a broad shift in China towards online shopping, which can undermine stores by using less labor and operating from cheap warehouses. Mr. Kang was forced to pay high rent for his store despite the pandemic. He finally closed it in June.
“We can barely survive,” he said.
Another lingering difficulty for small businesses in China is the high cost of borrowing money, often at double-digit interest rates from private lenders.
Chinese leaders are aware of the challenges faced by private companies. Premier Li Keqiang has promised further tax and fee cuts to help the country’s many struggling small businesses.
On Monday, China’s central bank made a small move to cut interest rates, which could help slightly reduce interest charges for the country’s heavily indebted property developers. The central bank cut its benchmark interest rates for one-week and one-year loans by about a tenth of a percentage point.
The construction and equipping of new housing represents a quarter of the Chinese economy. Massive lending and widespread speculation have helped China erect the equivalent of 140 square feet of new housing for every urban resident over the past two decades.
This fall, the sector faltered. The government wants to limit speculation and deflate a bubble that had made new housing unaffordable for young families.
China Evergrande Group is just the largest and most visible of a long list of real estate developers in China that have faced serious financial difficulties in recent times. Kaisa Group, China Aoyuan Property Group and Fantasia are among other developers who have struggled to make payments as bond investors grow wary of lending money to China’s property sector.
As real estate companies try to conserve cash, they are launching fewer construction projects. And that has been a big problem for the economy. The price of steel rebar for concrete in apartment towers, for example, fell by a quarter in October and November before stabilizing at a much lower level in December.
Falling house prices in small towns have hurt the value of people’s assets, making them less willing to spend. Even in Shanghai and Beijing, apartment prices are no longer rising.
Understanding the Evergrande Crisis
What is Evergrande? The Evergrande Group, a sprawling Chinese real estate giant, has the distinction of being the most indebted developer in the world. It was founded in 1996 and took advantage of China’s housing boom which has urbanized large swaths of the country and has millions of apartments in hundreds of cities.
There have been faint signs of renewed government support for the property sector in recent weeks, but no sign of a return to lavish lending by state-controlled banks.
Evergrande’s financial distress “is a signal that money will be pushed from real estate to the stock market,” said Hu Jinghui, an economist who is the former chairman of the China Alliance of Real Estate Agencies, a group domestic trade. “Policies can be relaxed, but there can be no turning back.”
Local governments are feeling the pinch
The slowdown in the housing market has also hurt local governments, which rely on land sales as their main source of revenue.
The International Monetary Fund estimates that government land sales each year have raised funds equivalent to 7% of the country’s annual economic output. But in recent months, developers have scaled back land purchases.
Starved of revenue, some local governments have halted hiring and cut bonuses and benefits for civil servants, prompting widespread complaints on social media.
In Hangzhou, the capital of Zhejiang province, a civil servant’s complaint about a 25% cut in her salary quickly spread on the internet. The city government did not respond to a fax requesting comment. In the northern province of Heilongjiang, the city of Hegang announced that it would no longer hire “junior” workers. City officials removed the ad from the government website after it came to public attention.
Some governments have also increased fees charged to businesses in an attempt to make up the shortfall.
Bazhou, a city in Hebei province, levied 11 times more fines for small businesses from October to December than in the first nine months of last year. Beijing has criticized the city for undermining a national effort to reduce the cost of doing business.
Pockets of strength in exports
Strong foreign demand for Chinese exports, especially consumer goods, has spurred a domestic wave of investment in new factories, up 13.5 percent last year from 2020.
Some areas of consumer spending have been quite robust, notably the luxury sector, where sports cars and jewelry are selling well. Retail sales rebounded 12.5% last year from pandemic-depressed levels in 2020. But retail sales fell in December from November as coronavirus restrictions kept some shoppers at home.
Few expect the government to allow a severe economic downturn this year ahead of the Communist Party Congress. Economists expect the government to ease restrictions on lending and increase public spending.
“The first half of the year will be tough,” said Zhu Ning, vice dean of the Shanghai Advanced Institute of Finance. “But then the second half will see a rebound.”
Li you contributed to the research.