Does China's economy have all the momentum it needs to recover?

Policy makers in China are struggling to limit the impact of the Omicron mutant, whose first infection was detected in Beijing in mid-January.

Unlike other countries, China does not intend to coexist with this new mutant even if it is less dangerous than the rest of the other strains, and a widespread closure was imposed on the city of Xi'an (central China) after failing to contain the outbreak of the virus quickly enough.

The British magazine The Economist said that shutdowns in other Chinese cities have had a limited impact on the supply chain, but foreign customers are concerned about what could happen to exports in the event of a widespread shutdown.

Indicators and numbers

According to figures released on January 17, China's GDP grew by 8.1% in 2021, the fastest pace since 2011, while its nominal GDP grew by 12.6%.

As the value of the currency also strengthened, the value of China's GDP exceeded $17.7 trillion, marking an increase of 20% over the previous year.

Given these indicators, it appears that the Chinese economy has all the momentum it needs.

China does not intend to coexist with Omicron, as it imposed a large-scale closure on several Chinese cities (Shutterstock)

Since the pandemic weakened the Chinese economy a lot at the beginning of 2020, its growth in the following year is obviously going to be significant, and by 2021 it is starting to slow.

In the last three months of 2021, the growth rate was more modest (in the order of 4%) compared to the same period of the previous year.

Although the growth rate was higher than expected, it was also less than what China's rulers wanted.

According to The Economist, intermittent restrictions on travel and gatherings hampered spending on goods and shrank last December, compared to the previous year.

Economic growth in the last quarter of 2021 was also affected by the coal shortage crisis, environmental protection laws in the energy sector, regulatory restrictions affecting technology companies and the debt crisis that engulfed real estate developers.

Side effects

After the economy quickly recovered from the first wave of the epidemic, policymakers in China realized that it was time to reduce some of the negative side effects of growth, such as pollution and real estate speculation, because the economic momentum seemed to be guaranteed;

Exports boomed as spending increased worldwide on goods;

Such as medical masks, bicycles and video games, in return for the decline in the demand for services.

But this external source of growth may taper off next year as foreign spending becomes more focused on services.

China's export boom is less impressive than it appears;

In the past, Chinese exporters undervalued their sales to avoid VAT, and now they have fewer reasons to do so with China's more generous tax facilities.

In this case, exports would appear to have grown faster than they used to be, and this change in the value of reported exports explains the exaggerated growth of Chinese exports by more than two percentage points in 2021, according to Thomas Gately of the consulting firm Gevcal Dragonomix.

China's policymakers seem to have realized somewhat late that economic growth needs stability.

On January 17, the Chinese Central Bank lowered the basic interest rate on lending from 2.95 to 2.85%, and the Chinese government is easing fiscal policy, by extending income tax breaks, and encouraging local governments to issue more special bonds. .

Chinese exports boomed in light of the increase in global spending on goods versus the decline in the demand for services (Shutterstock)

Opportunities for growth

The magazine said analysts at Morgan Stanley are relatively optimistic about the Chinese government's chances of meeting its growth target this year, as long as policymakers work to prevent a property market slump.

Home sales fell nearly 18% in December, compared to the previous year.

To stop this, government officials have been trying hard to reassure clients that the apartments they previously purchased will be built even if the contractor who sold them goes bankrupt.

In light of the decline in mortgage rates, some Chinese cities have resorted to providing subsidies and tax cuts to encourage home purchases.

Although policymakers are committed to achieving economic stability, they remain concerned about overstimulating a property market prone to speculative bubbles.

For now, Beijing wants local governments to do enough to ensure growth without exaggeration.