A Hangzhou site of the Element Fresh chain, which went into liquidation in December 2021, as the coronavirus pandemic was wreaking havoc.
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BEIJING – Weak consumer spending has weighed on China’s economy since the pandemic, with little relief in sight for 2022.
Along with the real estate market, consumption is one of the two areas of greatest concern to economists in their outlook for growth in China. Consumer spending is also the area that businesses and investors have bet on, as they expect the purchasing power of China’s middle class to increase in the years to come.
Beijing’s top leaders warned at an economic planning meeting this month that growth faces “triple pressure” from shrinking demand, supply shocks and weakening expectations. .
“The central problem with these ‘triple pressures’ is always weakening demand or insufficient demand,” Wang Jun, chief economist at Zhongyuan Bank, said in Mandarin, translated by CNBC. “If demand improves, expectations will improve.”
The main reason why economic development cannot be sustained is reflected in weakening demand, he said, noting in particular the negative impact of the pandemic on people’s incomes. He also pointed to demand brakes due to cuts in local government spending on infrastructure projects and regulations on after-school tutoring companies that have affected employment.
Regarding the third pressure of supply shocks, he clarified that they are mainly linked to the pandemic and too drastic measures to reduce carbon emissions, which have since been adjusted. Virus-related restrictions on return to work have contributed to disruptions in global supply chains, including a shortage of critical components like semiconductors.
Global uncertainty about jobs and income reduces people’s willingness to spend. Beijing’s crackdown on real estate developers’ reliance on debt also affects perceptions of household wealth, as the majority is tied to property.
“The recovery in consumption next year will have a very big impact on the economy,” Jianguang Shen, chief economist at Chinese e-commerce company JD.com, said in Mandarin, translated by CNBC.
Shen said authorities could boost consumption by following Hong Kong’s lead by offering vouchers. This would force consumers to spend at specific businesses like hotels, further encouraged by a tiered structure that wouldn’t unlock subsequent vouchers until the first one expires or has been used.
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Hong Kong’s retail sales contracted in 2019 and 2020 as protests disrupted the local economy, even before the pandemic cut the semi-autonomous region off from foreign and mainland tourists. Local authorities launched the latest voucher program in August and retail sales for the year through October are up 8.45% from the same period in 2020.
Mainland Chinese retail sales fell last year despite the overall growth of the economy. Comparisons to the drop helped retail sales rise in the first quarter, but the pace of the increase has slowed, especially since the summer. Retail sales for the first 11 months of the year increased another 13.7% compared to the same period in 2020.
Goldman Sachs analyst estimates, Goldman Sachs analyst estimates, Goldman Sachs analyst estimates, consumers increased spending by industry, rather than on food and clothing services rather than services such as education and entertainment. They expect the gap between goods and services to narrow slightly next year.
But even with their projections of 7% growth in real household consumption next year, it “would remain below its pre-Covid trend by the end of 2022,” analysts said. . They pointed to the brakes of China’s “zero tolerance” policy to control Covid and the slowdown in the real estate sector.
The investment bank expects China’s GDP to slow to 4.8% growth next year, from 7.8% expected this year.
Real estate needs buyers
Problems in China’s sprawling real estate market caught the attention of global investors this summer as indebted developers like Evergrande were on the brink of default, sparking fears of contagion. Government efforts to curb high industry debt levels and soaring house prices have resulted in tighter financing conditions for developers – and lower sales and prices.
Real estate represents “the biggest headwind of growth in 2022,” said Larry Hu, Macquarie’s chief economist for China, in his outlook report. He expects housing starts and sold areas to fall at an even faster rate next year, and real estate investment to drop 2%, after rising 4.8% this year.
“Housing policy is expected to shift from tightening to easing over the next year, as we expect policymakers to champion 5% GDP growth,” Hu said. “The risk is that they react too late, given their reluctance to use the property as a stimulus vector.”
China’s high-level economic planning meeting this month did not signal much change in real estate policy. Beijing has maintained its position that “houses are for living, not for speculation.”
It will likely take a few years to resolve the problems in the real estate industry, said Wang of Zhongyuan Bank. In the meantime, he expects the central government to issue debt and spend more to help local governments cope with the impact on their income.
Regional and local governments make at least 20%, if not more, of their revenues from the sale of land to developers, according to Moody’s.
A challenge for policymakers is to reduce real estate debt levels while ensuring that the real estate market does not slow down drastically.
“Weak market sentiment is also affecting residential home sales as buyers postpone their purchases in anticipation of a further drop in prices,” Fitch said in a report last week. The company expects a 15% drop in home sales by value next year, which could lead to a cash shortage for five of the 40 developers in its rating coverage.
“We predict that a reduction in real estate construction activity will spill over to related sectors, such as steel, iron ore and coking coal, slow overall capital investment and even put pressure on financial institutions. “said Fitch.
For next year’s economic policy, Beijing stressed that stability is its priority. The authorities have also made it clear this year that the quality of growth is increasingly important than the quantity.
The Columbia University Earth Institute, the China Center for International Economic Exchanges, and the Ali Research Institute attempted to assess this progress using a national sustainability index. In addition to GDP, the index incorporates factors such as the income of high-tech companies and spending on education, social protection and pollution treatment.
The index rose to 82.1 in 2019, from 59 in 2015, according to the latest press release this month.