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China’s GDP grew by 8.1% in 2021, but growth is slowing

The growth figure for 2021 is roughly in line with the expectations set by many economists. And it surpasses the Chinese government's goal last year that its economy should grow by at least 6%.

But GDP grew only 4% in the last quarter of the year compared to the year before, according to government figures released on Monday, the slowest pace in a year and a half. The world's second largest economy may be struggling to grow much faster than until 2022, and China's central bank on Monday lowered a key interest rate for the first time since April 2020 in an attempt to increase activity.

"As everyone has seen, domestic growth is under pressure," Ning Jizhe, head of the National Bureau of Statistics, told a news conference in Beijing on Monday.

Growth in the fourth quarter was boosted by industrial production, which rose 4.3% in December compared with a year earlier - accelerating from November's growth of 3.8%.

This was partly due to the continued strength of exports. Shipments from China beat forecasts and rose 21% in December, bringing the value of China's exports for the year to nearly $ 3.4 trillion.

But consumption was dramatically weakened amid renewed Covid-related disruptions, such as the massive eruptions in Zhejiang and Xi'an, which prompted authorities to close entertainment venues. close factories, and quarantine thousands of people. Retail sales increased only 1.7% in December from a year earlier, which is significantly lower than the November increase of 3.9%.

Real estate investments and new housing projects that have begun construction also fell.

While the last quarter was "better than expected," according to Larry Hu, China's chief economist for the Macquarie Group, the economy is facing "many headwinds" this year, particularly from Omicron and the real estate sector.

Hu said in a research note that Monday's rate cut indicated that the People's Bank of China was now ready to loosen monetary policy further. He suspected that China's prime rate - a benchmark rate at which commercial banks lend to their best customers - could be next.

"Downward pressure on growth will continue in 2022," wrote Louis Kuijs, head of Asian economics at Oxford Economics, in a research report on Monday. While he expects real estate activity to eventually begin to recover in the second half of the year, Kuijs also suspects that China is unlikely to slacken on its zero-tolerance approach to Covid until the end of the year.

"As a result, we expect disappointing consumption growth this year, especially" in the first half of 2022, "Kuijs added.

A troubled real estate sector

China has struggled with a number of issues recently, including tumult in its real estate sector.

The troubled Chinese real estate developer Evergrande - which has about $ 300 billion in total liabilities - has struggled to pay its debts and was recently ordered to demolish a few dozen buildings in the country. Analysts have long been concerned that a collapse of Evergrande could trigger greater risks to China's real estate market, damaging homeowners and the wider financial system.
Another major Chinese property developer may need to sell property

Monday's statistics showed that real estate investment grew 4.4% last year. December, however, marked a marked downturn: Investment fell by 13.2% in that month alone, according to an estimate by Chaoping Zhu, global chief strategist for JP Morgan Asset Management.

And the amount of floor space covered by newly started housing projects plummeted more than 11% in 2021 from the previous year, government data showed.

"We expect further weakness [of the housing sector] over the coming quarters amid tight funding constraints for developers, "said Julian Evans-Pritchard, senior China economist for Capital Economics, in a Monday note.

China's zero-covid policy will continue

Beijing's unwavering insistence on eradicating any trace of coronavirus, meanwhile, faces a huge test as authorities struggle with stubborn outbreaks and lock large sections of the population to curb them.

Economists have warned that China's zero-Covid approach to curbing the virus could pose serious problems for the economy in 2022. Goldman Sachs, for example, lowered its projection for Chinese economic growth in 2022 to 4.3% from 4.8% , just over half of last year. years. They expect consumption to be hit hardest by the strict Covid restrictions.

December's weak retail sales data already shows evidence of how disruptive coronavirus is becoming in China.

Beijing on high alert as China's first Omicron cluster approaches closer weeks before the Olympics

"The resurgence of regional outbreaks and shutdowns as well as supply bottlenecks in the automotive industry all weighed on consumption," said Zhu of JP Morgan Asset Management.

Now the threat posed by Omicron to factories and supply chains is exacerbating the problem.

The congestion of ships in Chinese ports has worsened recently as several cities implement strict Covid restrictions due to the eruptions. In some places, test policies are also being tightened ahead of the Chinese New Year holiday season, which starts on 31 January.

The Shekou terminal in Shenzhen, for example, has begun restricting truck drivers' bringing in loaded containers. From Friday, hauliers can only enter the terminal if they have reservations for export-bound containers on ships arriving within three days, according to a recent statement from the operator.

More easing is expected

However, these economic challenges are likely to mean that the Chinese government will have to take more drastic steps to keep things running.

By the time the central bank lowered interest rates on Monday, it had already begun to loosen its wallet. Last month, it lowered both the reserve requirement ratio - which determines how much cash the banks must have in reserve - and the borrowing rate.
The Central Economic Labor Conference - an event hosted by Chinese top leaders in December to determine the direction of policy in 2022 - also signaled that the authorities are willing to take more aggressive action this year. At that meeting, the government signaled that it would be proactive about policy and expects to prioritize infrastructure investment and support commercial housing markets.

But Zhu from JP Morgan Asset Management pointed out that these measures do not seem to have been enough yet. Bank lending to the private sector has e.g. not yet addressed meaningfully.

"This suggests that business confidence has not been restored," he wrote. "Therefore, further political easing over a longer time horizon is crucial."

Zhu expects the central bank to make further cuts in borrowing rates in the coming months. China could also allow local governments to issue more special bonds by 2022. Such bonds mainly fund infrastructure projects, which can help spur investment and create more jobs.

"With these policies in mind, China's growth outlook may stabilize and 5% GDP growth may be achievable by 2022," Zhu said.


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