Stability Concerns Will Drive China’s Economy in 2022

THE CENTRAL ECONOMIC WORK CONFERENCE that concluded this week does not appear to have brought anything to suggest other than the controlled slowdown of the economy will continue next year with an emphasis on authorities ensuring financial and social stability. 

That implies a continuing effort to ensure that the private sector aligns with the public interest as defined by the Party and that the efforts to wean the economy off its dependence on the property sector will continue in the drive for more consumption-based, sustainable and inclusive growth.

That, in turn, suggests that the regulatory crackdown will persist for some time, notably in non-SOE-dominated technology sectors. The reining-in of anti-competitive and big-data collection power will go on, and capital-market activity will also continue to be tightly if flexibly regulated. That, at least, is this Bystander’s interpretation of the cryptic mention in the Economic Work Conference of the promise of ‘traffic lights for capital’.

Those may all be measures to tackle the long-term headwinds of rebalancing and decoupling. More immediately, while the economy has rebounded from the worst of the pandemic-related disruption in 2020, it has slowed in the second half of this year due to global economic conditions and policy deleveraging, including cooling the property market.

Slowing exports to the United States and the EU in November indicate choppy waters in international trade that could get rougher if the Omicron variant causes a new wave of disruptive infections. 

Nor has the property crisis gone away. Beleaguered developer Evergrande has been declared in restricted default by the credit rating agency Fitch after the expiry of the grace period for a missed international bond payment. 

Authorities have the administrative and financial resources to prevent it from becoming a systemic risk, but the ‘restructuring’ of Evergrande still has to be managed in a way that ends the implicit guarantee of state bailouts for overextended property developers and their investors but does rescue the individuals and families who have bought their properties, built and unbuilt.

As the property sector accounts for 25-20% of GDP, this inevitably cannot be done without slowing growth. The People’s Bank of China has cut the reserve requirement ratio for banks by 50 basis points to an average of 8.4% to boost lending to generate some stimulus. The central bank offset this by repaying liquidity injections through its medium-term lending facility, indicating its concern about the risks of financial instability.

Signalling that stability is a macroeconomic priority suggests that policy in 2022 will be to continue the orderly management of deleveraging and the slowdown in GDP growth. Unemployment and the associated risk of social unrest, rather than GDP targets, are policymakers’ ultimate concerns. Those will determine the extent to which authorities will tolerate slower growth.

This year, the official GDP growth target is 6%, down from 6.0-6.5% in pre-pandemic 2019. The recommendation by the Chinese Academy of Social Sciences (CASS), the country’s leading research institution, that the government lower its 2022 target to 5% — to allow a ‘focus on promoting reforms and innovation and pushing for high-quality development’ — will be reflective of official intent.

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