Although China’s economic data for June suggest economic activity was starting to recover from the previous two months, when the country was hit hard by Covid-19 flare-ups, the recovery was imbalanced. Consumer spending and the real estate industry remain the two biggest challenges facing China’s economy, so it won’t be easy to hit the government’s GDP growth target of around 5.5% for 2022.
The economy grew a mere 2.5% year-on-year in the first half. To hit the annual target, growth will have to reach 8.1% in the second half. Although China’s GDP did grow 12.7% in the first half of last year, that was only because of an extremely low baseline from the same period of 2020, when Covid lockdowns disrupted a great deal of economic activity. The economy grew more than 4% in the second half of last year, which is a high comparison base for the same period this year.
The current data does not inspire confidence for a GDP surge in the second half of this year. After taking into account inflation, retail sales barely increased in June. Consumption accounts for more than half of China’s GDP, so unless it has a strong bounce off the bottom in the second half, it’s hard to imagine that economic growth can exceed 8% over the period.
Consumption as a share of GDP peaked at around 56% in 2019 before the pandemic, up from 49% in 2010. In 2021, its share fell to slightly over 54% and is expected to drop further this year.
The sluggishness of consumer spending in recent years has a lot to do with the pandemic. Confirmed Covid-19 cases can easily disrupt people’s lives. A citywide lockdown, which can last from 10 days to more than two months, can force restaurants and tourism businesses to curtail their operations. That not only takes a toll on consumer spending, but the resulting uncertainty also hurts people’s expectations for employment and income, which in turn has a negative impact on the sales of property, appliances and automobiles.
Moreover, the pandemic has also taken a toll on investment and borrowing, especially for small and midsize enterprises. Many small-business owners depend on small bank loans to furnish their businesses, such as restaurants and beauty salons. Nevertheless, these businesses are the ones most susceptible to the pandemic, so their owners have grown increasingly cautious about investment.
Therefore, it’s evident that consumption will probably be one of the economy’s main weaknesses this year. That said, it’s undeniable that the higher-than-expected retail sales data for June show that people are willing to spend under loosened policy measures.
The other major drag on the economy is real estate. Property sales have been falling for more than a year, and the recent mortgage boycotts around China have been worsening the decline.
From a macro perspective, the country’s homeownership rate is fairly high. Demand mainly comes from residents relocating to cities and from current urban residents looking for an investment property or quality-of-life upgrade. At present, it’s irrational to assume that demand from new urban residents can underpin home prices in major cities. In addition, it’s likely that there isn’t as much urgent demand for investment properties and quality-of-life upgrades because a lot of current urban residents are holding off due to the unpromising economic outlook. If the current mortgage default crisis worsens, demand for investment properties and quality-of-life upgrades will take a big hit.
Mortgage defaults and unfinished projects are the direct results of developers’ insufficient cash flows. For the past 20 years, unfinished projects were never a big problem for the burgeoning property sector as home prices were rising continuously. If the current crisis cannot be handled appropriately to ensure the delivery of presale homes, demand for investment properties and quality-of-life upgrades will be consistently depressed in the long term.
In the second half, China will have to rely on exports and infrastructure to drive economic growth. However, as countries from Southeast Asia and Central America gradually recover from the pandemic and restore their production capabilities, it’s hard to say whether China’s strong exports will last.
In the foreseeable future, the outlook of infrastructure investment is uplifting. Over the last two months, the amount of new medium- and long-term enterprise loans and bonds has both increased significantly year-on-year. It’s likely that these funds will mainly be used to invest in government-driven infrastructure projects.
Still, how the economy will grow next year and beyond remains a longer-term issue that needs to be addressed. From 2010 to 2020, the economy was largely driven by consumption and services, both of which have now been affected by issues such as the pandemic, tightened oversight of internet platforms and a declining real estate sector.
Vincent Chan is a China strategist at investment advisory firm Aletheia Capital and a former head of China equity strategy at Credit Suisse.
This commentary was translated by Zizan Wang, and has been edited for length and clarity.
Contact editor Michael Bellart (michaelbellart@caixin.com)
The views and opinions expressed in this opinion section are those of the authors and do not necessarily reflect the editorial positions of Caixin Media.
If you would like to write an opinion for Caixin Global, please send your ideas or finished opinions to our email: opinionen@caixin.com
Download our app to receive breaking news alerts and read the news on the go.
Get our weekly free Must-Read newsletter.
Update: China’s Second-Quarter GDP Growth Sinks to 0.4% as Lockdowns Bite
In Depth: What’s Behind China’s Mortgage Strikes?
Participation of Indian Prime Minister Narendra Modi in the 5th Eastern Economic Forum Discussed in Moscow
Get exposure for your startup at RISE 2020
CreditEase’s Tang Ning: China’s Wealth Management Market is Undergoing Five Major Shifts
Meet 5 of the best startups selected to represent China at the largest technology event in Asia
Contact Caixin Insight
News Services
About Us
Terms of Use
Media Partners
Copyright © 2021 Caixin Global Limited. All Rights Reserved.
OR