World Bank projects grim picture of Chinese economy

In two back-to-back reports in September and December 2022, the World Bank has projected a grim picture of the Chinese economy in 2022 and 2023. The second largest economy of the world is now falling back in the race, not only with the USA, the global leaders, but also its closest neighbour India with which China is vying to gain supremacy in Asia.

The two World Bank reports said the growth rate of the Gross Domestic Product of China is expected to slow sharply to 2.7 percent in 2022, much below the 8.1 percent rate achieved in 2021. It could recover to 4.3 percent in 2023. The latest growth forecast for Indi in 2022-23 is seven percent.

An AP report from Beijing on October 31, 2022, quoting an official survey in China, says the manufacturing sector in China has weakened, adding to the downward pressure of the economy. Repeated shutdown of Chinese cities as part of zero-Covid policy is weighing on consumer spending. A crackdown on debt has cooled the real estate sector. In the first half of 2022, the growth rate dropped to 2.2 percent. The overall growth rate in 2022 could be as low as three percent, the second weakest since the 1980s.

In any case, the target of 5.5 percent growth rate now seems to be quite out of reach for Beijing. Amid multiple domestic and international reverses, China is unlikely to reach any time soon the high growth trajectory which has been witnessed before; an average growth rate of nine percent since 1978 when China began to open up and reform its economy.

According to the World Bank reports, China’s high growth rate, based on investment, low-cost manufacturing and exports, has reached its limits and has led to economic, social and environmental imbalances. Reducing these imbalances requires shifts in the structure of the economy from manufacturing to high value services, from investment to consumption, and from high to low carbon intensity; none of which seems to be the priority of the mandarins of the ruling Communist Party of China.

To the detriment of Beijing, the property market has slowed down; triggered by the tightening of regulations that has led to a liquidity squeeze for developers. The demand for real estate has remained subdued due to weak sentiments of buyers of houses amid repeated outbreaks of Covid-19 and the refusal of buyers to invest on houses still under construction. The slowing down of the real estate sector is having a cascading effect on the economy of China.

In the face of structural constraints like a decline in the rate of growth of the labour force, diminishing returns on investment and the slowing down of the growth in productivity, the overall growth rate has come down. The rapid growth rate in the past has outpaced institutional development and now there are yawning gaps in institutional reforms.

With President Xi Jinping now bent on putting the country on the reverse gear and taking it back to the days of Mao Zedong, these required reforms are unlikely to materialize. A fair and stable business environment and support to the market system which, according to the World Bank, are the need of the hour are not the priorities of the Chinese government.

The World Bank has pointed out that the Chinese economy is also vulnerable to climate change, the tightening of the global financial conditions and heightened geopolitical tensions, for which Beijing itself is the worst culprit.

A BBC study on the Chinese economy in October 2022 has said that in the quarter of April to June 2022, China narrowly escaped experiencing an actual contraction of the economy. The so-called “factory of the world” now finds fewer customers for its products, either domestically or internationally. The value of the Chinese Yuan has plummeted against the U.S. dollar, badly affecting sentiments of investors.

The damaging zero-Covid policy which Beijing finally abandoned in December 2022 has already taken its toll in manufacturing hubs like Shenzhen and Tianjin. Private studies have shown that factory output fell in September 2022. People were not spending on food, beverages, retail or tourism.

The BBC study, too, finds weak real estate activities and negative sentiments in the housing sector have slowed growth. With people unsure of the economic conditions, confidence is weak in the housing market. The overall impact of this slowdown on the Chinese economy is enormous as properties and other activities that contribute to it comprise one-third of the GDP of China. Home buyers are refusing to make mortgage payments on unfinished buildings, fearing the houses would never be completed. Real estate prices in dozens of cities have declined by more than20 percent. A campaign by the authorities to reduce the high debt level has led to a liquidity crisis among property developers, resulting in shelved projects.

In its anxiety to shore up an unsustainable rate of growth, the Chinese government has encouraged bad investment in the real estate sector.  Aided by finance at concessional rates, real estate developers had a heyday. Now that the market is saturated and the demand for real estate has slumped, these real estate firms are unable to repay their debts.

With China being the world’s largest emitter of greenhouse gases, the license that Beijing has taken to pollute the environment is now having an adverse impact on the industries in China. In places like Siachen and Chongqing where industries are dependent on hydro-electric power, severe heat waves have pushed up domestic demand for power by way of increased use of air-conditioners while generation has come down because of drought-like conditions. This has meant less power to the factories. iPhone makers Foxconn and Testa have been forced to cut down working hours or shut altogether for paucity of power. Profits in the iron and steel industry which has been the engine of growth in China have come down by 80 percent in the first seven months of the calendar year of 2022. 

The BBC study has also found that the crackdown on technological giants of China by regulatory bodies has backfired. The profits of Tencent have fallen by 50 percent and the net income of Alibaba has halved. Tens of thousands of workers in China have lost their jobs. In the age group of 16 to 24 years, the rate of unemployment is as high as 20 percent. With its penchant for classical communism, the Xi Jinping government has placed private companies under greater public scrutiny. As investors in the state sector are favoured, foreign investors are taking money off the table.

The first quarter result for 2022-23 for Tencent, China’s leading social media and video gaming company, recorded a 51 percent fall in profit, leading to selloff of its shares and those of other tech companies. The clampdown on tech giants started in November 2020 when regulators suspended the initial public offering of an affiliate of e-commerce giant Alibaba. The app of Didi, a leading ride-hailing company of China, was suspended for alleged violation of cyber security laws. Meituan, a food delivery platform, became a victim of antitrust laws and was fined $530 million. Alibaba has lost two-thirds of its market capitalization since the end of 2020 and Didi has lost 80 percent of its IPO value.

Different reasons have been cited to control the activities of the tech giants or to impose fines, but the main factor at play is ideological and political bias against these tech giants which at one point of time were accounting for 30 percent of the GDP of China. Interestingly, according to a Reuters report, broadcasting companies have been asked to shun artists who, in the opinion of the Communist Party of China, had incorrect political positions. A ban on private tutoring in subjects which are part of school curriculum has led to a wave of closure of schools in the private education sector and layoffs.

 One of the guiding principles of the Xi Jinping government has been the “moderate prosperity campaign,” carried out since 2021, which encourages moderate prosperity of all and expects the wealthy to give back more to the society. Laudable goals no doubt, but as the history of development has shown all over the world, these goals do not work out in practice. Clearly, the political control that the Chinese government is trying to exercise is at a significant economic cost.

Advocates of the crackdown policy of Xi Jinping that is driving away foreign technological giants have argued that this will help the domestic companies to grow in the software technology sector and make China self-reliant; but the problem is that China is dependent on the USA and European countries on core technology and driving away the foreign firms may deprive China of modern and advanced technology. The strategy of President Xi Jinping to make China self-sufficient in core technology runs contrary to the reality of the present day when the world is interdependent. Besides, the tech giants being one of the biggest creators of jobs in China, this crackdown and the resultant closures are playing havoc in the job market in China, with thousands of lay-offs.

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