Grim days ahead for Chinese economy as growth rate to slump below 5 percent

China’s economy has received a big blow following the property crisis,  industrial slump, weak consumption besides the fallout from Covid-19-led lockdowns. Now, now the outbreak of the Omicron variant of coronavirus besides and possible blacklisting of Chinese companies by the US spell further trouble for China. The GDP growth in 2022 is predicted to slump below 5 percent, taking China’s economic growth rate to the 1990s level. Think tank China Finance 40 Forum, which has the deputy governor of People’s Bank of China (PBOC) as a member, has expressed concerns over growth rate remaining below 5 percent in case domestic demand fails to improve.

Global financial services group Nomura has cut economic growth for China in 2022 sharply–  2.9 percent in the first quarter and 3.8 percent in the second quarter. Rob Subbaraman, Nomura’s chief economist, said China’s GDP growth will slow down to 4.3 percent from 7.1 percent in 2021.

China’s economy had paced at 18.3 percent in the first quarter of 2021. However, the economic growth will be restricted to 5.3 percent in 2022, predicted Barclays plc citing power and property crisis.

Asian Development Bank too has expected slower growth for China– at 5.3 percent.

Amid the unprecedented power crisis, China saw China’s second-biggest property developer, Evergrande, stuck in debt of USD 300 billion.

Evergrande’s stocks plummeted by nearly 90 percent since July 2020.

“Our view is that currently, the property market is caught in a negative credit loop,” Franco Leung, associate managing director at Moody’s Investor Service.

The real estate bust is going to spell trouble for China’s economy as the housing activity accounts for 29 percent of GDP.

Yan Yuejin, director of E-house China Research and Development Institution, said “Cities of all classes are under pressure. The current scale of market supply is large and demand is weak.”

The sluggish investment in the property sector is adding to reduced consumption. “The worst of the policy tightening is behind us, but I am not sure we can say the worst of the financial or economic fallout is behind us,” Logan Wright, director of China markets research at Rhodium Group.

Even retail sales in China is on the decline. In November it dropped to 3.9 percent as compared to 4.6 percent in the corresponding month last year. Online sales of physical goods and auto sales too have gone downward.

“Headwinds and uncertainties are clouding the recovery pace of China’s economy,” said Bruce Pang, head of macro and strategy research at China Renaissance.

While Beijing has claimed that the power crisis due to the shortage of coal has eased, there is apprehension that harsh winters may cause coal stocks to deplete. This can again lead to power outages, impacting manufacturing and local businesses.

“The energy crisis is not yet over, there will be restocking demand in December to withstand bad weather,” Xiao Xiao Hong, China-based senior coal analyst.

Now there are reports that Chinese companies listed on Wall Street will not be removed from the US exchanges in the next three years. US government is set to blacklist eight big Chinese companies for their alleged involvement in the surveillance of Uyghur Muslims.

The investment and export sanctions on these companies have caused stocks of Chinese healthcare and technology to tumble as many more companies from China are expected to be blacklisted.

The entry of Omicron and the “zero tolerance” approach of the Beijing government is going to worsen the economic health and future of China further. Restrictions on local movement and industries will lower the output and revenue, thus aggravating the economic slowdown.

Beijing-based China daily wrote that the country was bracing for the hike in the prices of commodities and energy, which would have negative impact on the manufacturing sector and overall development of the Chinese economy.

Xi Jinping government too has hit the panic button following demands for corrective measures. “Our country’s economic development is facing the triple pressure of demand shrinking, supply shocks and weakening expectations,” reads a statement issued by the government.

Debt and sluggish consumption are going to be problematic for China financial stability and long-term growth.  “Policymakers are clearly concerned about the economy. Priority is shifting from regulatory tightening to supporting economic growth,” said ,” Larry Hu and Xinyu Ji of Macquarie, an investment bank.