THE OECD SEES China’s economy growing by 3.3% this year, a slight uptick from its 3.2% forecast in September. However, it has trimmed its forecast for 2023 to 4.6% from 4.7% in the face of a global economy expected to slow to 2.2% growth next year from 3.1% this.
Globally, tighter monetary policy, higher real interest rates, persistently high energy prices, weak real household income growth and declining confidence are all expected to sap growth, the OECD says in its latest Economic Outlook.
Those headwinds are buffeting China, but the OECD underlines how, additionally, the persistance of the omicron variant has caused recurring waves of lockdowns in 2022, disrupting economic activity.
Growth is being held up by infrastructure investment and efforts to bail out the property sector, including more stringent implementation of credit quotas for presold housing and a lower lending rate for first homebuyers.
Monetary policy has generally become more supportive with a series of interest rate and reserve requirement rate cuts.
Against that, a rise in precautionary household savings, spurred by low consumer confidence coupled with inadequate social protection, is holding back a rebalancing of demand towards consumption.
However, despite recent fresh food price rises, the OECD expects headline consumer price inflation to remain benign due to measures to manage energy and food prices:
- Replacing part of China’s crude oil imports with discounted Urals oil from Russia is helping to contain inflationary pressure, and LNG reserves are being refilled from Russian sources.
- China’s large grain reserves and export restrictions in the form of quotas will continue to mitigate the impact of rising global grain prices on domestic inflation and reduce the risk of shortages.
Lockdown-induced supply-side constraints on fresh food are the more significant inflationary concern.
The OECD also expects fiscal policy to become more supportive through cuts and deferrals of taxes and charges and spending of reserve funds. It says that a wide range of additional policies is being implemented, including ones outside the public budget. Overall, the measures are worth 1-2% of GDP.
Export growth will also likely stay low amid weaker global growth before picking up in 2024.
Over that time horizon, the OECD expects GDP growth to gradually move back to its underlying pace, which is slowing. It is forecasting 4.1% growth in 2024. Meanwhile, infrastructure investment will pick up, partly offsetting weaker real estate investment.
However, the OECD warns:
Continued defaults and disorderly deleveraging in the overstretched property sector may trigger failures of smaller banks and shadow banking institutions. By contrast, relaxing prudential measures and encouraging investment in real estate may fuel the bubble and cause more significant disruptions further down the road.
A further rise in corporate defaults will improve risk pricing but may adversely affect banks, trust companies, and other private and institutional investors.
The key downside risk remains Covid-19. Vaccination rates have picked up, but they remain low among the elderly, especially those over 80. Booster jabs also seem to have plateaued. Further, the effectiveness of Chinese vaccines is less than that of Western ones.
That makes lifting the zero-Covid policy nigh impossible in the near term, regardless of its economic cost. The recent outbreaks have foiled attempts to administer it more flexibly.
Like the IMF, the OECD calls for structural reforms to strengthen the social safety net, which would help to reduce precautionary savings and rebalance demand from investment to consumption. It suggests that pension and unemployment insurance coverage should be extended to all and health insurance coverage widened.
It also suggests a series of reforms that would strengthen the private sector and lessen the dominance of state-owned enterprises, although that is not the tenor of the new era.