China’s economy is slowing, a worrying sign for the world


Construction and real estate sales have collapsed. Small businesses have closed due to rising costs and weak sales. Over-indebted municipalities are cutting civil servants’ salaries.

China’s economy slowed significantly in the final months of last year as government measures to limit real estate speculation also affected other sectors. Lockdowns and travel restrictions to contain the coronavirus also weighed on consumer spending. Strict regulations on everything from internet businesses to tutoring companies have sparked a wave of layoffs.

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Construction and real estate sales have collapsed. Small businesses have closed due to rising costs and weak sales. Over-indebted municipalities are cutting civil servants’ salaries.

China’s economy slowed significantly in the final months of last year as government measures to limit real estate speculation also affected other sectors. Lockdowns and travel restrictions to contain the coronavirus also weighed on consumer spending. Strict regulations on everything from internet businesses to tutoring companies have sparked a wave of layoffs.

China’s National Bureau of Statistics said on Monday that October-December economic output was just 4% higher than the same period last year. That was a slowdown from the 4.9% growth seen in the third quarter from July through September.

Global demand for consumer electronics, furniture and other home comforts during the pandemic has fueled record-breaking exports for China and prevented its growth from faltering. Overall, China’s economic output last year was 8.1% higher than in 2020, the government said. But much of the growth was in the first half of last year.

The outlook for China’s economy, the main engine of global growth in recent years, adds to expectations that the broader global economic outlook is beginning to weaken. To make matters worse, the Omicron variant of the coronavirus is now spreading in China, prompting further restrictions across the country and raising fears of renewed disruption to supply chains.

The slowing economy poses a dilemma for the Chinese leadership. The measures they imposed to tackle income inequality and rein in businesses are part of a long-term plan to protect the economy and national security. But officials are wary of causing near-term economic instability, especially in a year of unusual political significance.

Next month, Beijing is hosting the Winter Olympics, which will turn the international spotlight on the country’s achievement. In the fall, Xi Jinping, China’s leader, is expected to claim a third five-year term at a Communist Party convention.

Xi has tried to sound an upbeat note. “We have full confidence in the future of China’s economy,” he said Monday in a speech to a virtual session of the World Economic Forum.

But with his country’s growth slowing, demand easing and debt still near record highs, Xi could face some of the biggest economic challenges since Deng Xiaoping began wresting the country out of its Maoist straightjacket four decades ago.

“I am afraid that the operation and development of China’s economy may be relatively difficult in the coming years,” said Li Daokui, a prominent economist and Chinese government adviser, in a speech late last month. “If you look at the five years as a whole, it could be the most difficult time since we reformed and opened up 40 years ago.”

China also faces the problem of a rapidly aging population, which could put an even greater strain on China’s economy and workforce. The National Bureau of Statistics said Monday that China’s birth rate has fallen sharply over the past year and is now little more than the death rate.

Struggles in the private sector

As the cost of many commodities has risen and the pandemic has prompted some consumers to stay at home, millions of private businesses have collapsed, most of them small and family-owned.

That’s a big problem because private enterprise is the backbone of China’s economy, accounting for three-fifths of production and four-fifths of city employment.

Almost three years ago, Kang Shiqing invested much of his life savings to open a women’s clothing store in Nanping, a river city in southeast China’s Fujian Province. But when the pandemic hit a year later, the number of customers dropped drastically and never recovered.

Like many countries, China has seen a broad shift towards online shopping, which can undercut stores by using less labor and operating from cheap warehouses. Kang has had to pay high rent for his business despite the pandemic. He finally closed it in June.

“We can hardly survive,” he said.

Another persistent difficulty for small businesses in China is the high cost of borrowing, often at double-digit interest rates from private lenders.

The Chinese leadership is aware of the challenges faced by private companies. Premier Li Keqiang has promised more tax and fee cuts to help the country’s many struggling small businesses.

On Monday, China’s central bank took a small step to cut interest rates, which could help slightly lower interest costs for the country’s heavily indebted real estate developers. The central bank cut its interest rate benchmarks for one-week and one-year lending by about a tenth of a percentage point.

construction stages

The construction and furnishing of new houses accounts for a quarter of China’s economy. Heavy credit and widespread speculation have helped China build the equivalent of 140 square feet of new housing for every city dweller over the past two decades.

That fall, the industry faltered. The government wants to curb speculation and deflate a bubble that has made new homes unaffordable for young families.

The China Evergrande Group is just the largest and most visible of a growing list of real estate developers in China that have been in serious financial trouble of late. Kaisa Group, China Aoyuan Property Group and Fantasia are among other developers struggling to make payments as bond investors grow wary of lending money to China’s real estate sector.

As real estate companies try to save money, they start fewer construction projects. And that was a big problem for the economy. For example, the price of rebar used in high-rise concrete fell by a quarter in October and November, before stabilizing at a significantly lower level in December.

The decline in property prices in smaller towns has affected the value of people’s wealth, which in turn has made them less willing to spend. Even in Shanghai and Beijing, art prices are no longer rising.

There has been faint evidence of renewed government support for the property sector in recent weeks, but no sign of a return to liberal lending from state-controlled banks.

Evergrande’s financial distress “is a signal that money is being 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 national trade group. “Politics can be relaxed, but there is no going 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 income.

The International Monetary Fund estimates that government land sales bring in money equivalent to 7% of the country’s annual economic output each year. But in recent months, developers have restricted land purchases.

For lack of revenue, some local governments have halted hiring and cut bonuses and benefits for civil servants, prompting widespread complaints on social media.

In Hangzhou, capital of Zhejiang province, a civil servant’s complaint about a 25% cut in her salary quickly spread online. The city administration did not respond to a fax requesting a statement. In the northern province of Heilongjiang, the city of Hegang announced it would stop hiring “low-level” workers. City officials removed the announcement from the government website after it attracted public attention.

Some governments have also levied fees on companies to try to make up the deficit.

Bazhou, a city in Hebei province, raked in 11 times the amount in fines against small businesses in October-December compared to the first nine months of last year. Beijing has criticized the city for undermining national efforts to lower the cost of doing business.

Strengths in export

Strong overseas demand for China’s exports, particularly consumer goods, spurred a national wave of new factory investment, which surged 13.5% last year from 2020.

Some areas of consumer spending have been fairly resilient, notably the luxury sector, with sports cars and jewelry selling well. Retail sales rebounded 12.5% ‚Äč‚Äčlast year compared to pandemic-related levels in 2020. However, retail sales fell in December versus November as some shoppers stayed home due to coronavirus restrictions.

Few expect the government to allow a severe economic downturn ahead of the Communist Party convention this year. Economists expect the government to ease restrictions on lending and increase government spending.

“The first half of the year will be challenging,” said Zhu Ning, deputy dean of the Shanghai Advanced Institute of Finance. “But then there will be a rebound in the second half.”

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