In early 2021, the consensus forecast for Chinese GDP growth this year among 25 major global banks and other professional forecasters was 8.3%. In contrast, the Chinese government’s own growth target was around 6%, lower than the best guesses of 24 out of the 25 institutional forecasters. Did the government know something that outsiders had missed? Did it plan to do something that it regards as desirable even though it might compromise growth?
More recently, international banks have revised down their full-year growth projections for China as the economy’s expansion has slowed. Third-quarter growth was only 4.9% year on year, down from 18.3% and 7.9% in the first two quarters, respectively. The high first-quarter year-on-year growth came in large part because of the negative growth in the first quarter of 2020 due to pandemic-induced lockdowns. The low third-quarter growth is raising concerns about the growth prospects in the fourth quarter and next year.
Some of the reduction in growth stems from China’s zero-tolerance policy toward COVID-19, which calls for more frequent lockdowns than in most other countries. A spate of local COVID outbreaks in the summer has triggered lockdowns or travel restrictions in multiple Chinese cities. These have not only reduced manufacturing output but also severely affected many service-sector jobs just as tourism was beginning to boom.
But the pandemic is not the only factor behind the slowdown. The government’s green industrial policy, tighter regulation of the property sector, and blacklists of online platforms also have collectively curtailed growth.
Following its pledge to halt the rise in China’s carbon-dioxide emissions before 2030 and achieve net zero by 2060, the government has forcefully and often abruptly reduced electricity generation in coal-fired power plants, sometimes by 20%. The resulting power outages disrupted production at affected factories.
In addition, the “three red lines” policy, initiated in August 2020 and intensified this year, sets ceilings on property developers’ debt-to-asset ratio, debt-to-equity ratio, and debt-to-cash ratio. Because many of these firms could not meet one or more of the red lines, and banks and capital markets are reluctant to provide new financing, they must sell assets, scale down operations, or both.
Evergrande may be the most prominent Chinese property developer to have run into financial trouble, but it is not the only one. Moreover, a real-estate downturn can easily spill over to industries such as steel, cement, and home furnishings and appliances.
Lastly, the authorities’ decisions to blacklist online-education companies, ratchet up antitrust enforcement, and enact a broadly worded data-protection law have helped to halve the stock prices of many listed digital-economy companies over the last 12 months. And falling equity valuations are merely the tip of the iceberg, as many digital firms and their suppliers have had to scale back their ambitions and plans. Hundreds of online-education providers have folded and laid off their employees.
The goals of the policies are sensible, but the manner of implementing them is exacerbating their economic costs. A zero-COVID strategy was arguably reasonable in the pre-vaccine stage of the pandemic, and helped China to achieve a positive economic growth rate last year. But as new variants continue to emerge, all countries will eventually have to learn to live with the coronavirus. Luckily, the cost of doing so is becoming more manageable as rates of vaccination and natural immunity rise.
If China is to use its strong implementation capacity, then pushing for universal COVID-19 vaccination would seem well justified (as individuals who decline the jab may end up harming others). On the other hand, periodic lockdowns and border closures are highly disruptive to the economy and people’s lives, and not a sustainable strategy in the pandemic’s post-vaccine phase.
Regarding green industrial policy, power generation is the most carbon-intensive sector in China, accounting for about 40% of the country’s energy-consumption-based emissions. So, reducing reliance on coal-fired electricity makes a valuable contribution to national and global emissions-reduction efforts. But there are different ways to manage the change.
China’s own experience with economic reforms suggests that using price signals and market forces tends to minimize the costs of structural change. In particular, raising China’s carbon price to a sufficiently high level and announcing a predictable price path with a sufficient lead time could enable electricity producers and users to adjust and adapt better, thus helping them to achieve the same amount of emissions reductions with much less foregone GDP growth. Such an approach would also be less disruptive for Chinese households, including many in the northeastern part of the country who may be worried about heating and power supply as a cold winter arrives.
Likewise, while moderating speculative price increases in real estate is a desirable goal, constraining property development does not necessarily help to achieve it. Given that roughly 30% of the Chinese economy rises or falls with the real estate and construction sectors, an alternative path could cushion the adjustment pains. For example, promoting more affordable housing for low-income families and migrants from rural areas could create offsetting demand for furniture, appliances, steel, and cement.
Restricting after-school learning programs can free up time for children to engage in activities that nurture creativity and athletic ability, and alleviate the financial burden for families that previously felt pressured to purchase online-education content for their children. So, there is a laudable social rationale for the new regulation. Its relatively sudden implementation, however, not only reduces online-education firms’ profits, stock prices, and employment, but also highlights the risk of abrupt policy changes in other sectors, affecting broader investor sentiment.
China can restore investor confidence and return to its potential growth rate. To do that, the country will benefit from reforms affecting how new regulations and pandemic-control measures are debated, vetted, and implemented.
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