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The location of Element Fresh is Hangzhou, which entered bankruptcy liquidation in December 2021 as the coronavirus pandemic took its toll.

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BEIJING – Sluggish consumer spending has weakened China’s economy since the pandemic, and no improvement is expected in 2022.

Along with the real estate market, consumption is one of the two areas that most worry economists about their growth prospects in China. Consumer spending is also a sector that businesses and investors are betting on as they expect the purchasing power of China’s middle class to grow in the coming years.

Top executives in Beijing warned at an economic planning meeting this month that growth threatens “Triple pressure” from declining demand, supply shocks and weakening expectations.

“The main problem with these ‘triple pressures’ continues to be weakening demand or insufficient demand,” said Wang Jun, chief economist at Zhongyuan Bank, in Chinese translated by CNBC. “If demand improves, so will expectations.”

According to him, the main reason why economic development cannot be sustainable is weakening demand, in particular, noting the negative impact of the pandemic on people’s incomes. He also pointed to a decline in demand due to cuts in local government spending on infrastructure projects and regulation of out-of-school tutoring businesses, which affected employment.

Regarding the third pressures of supply shocks, he said they were primarily related to the pandemic and the overly drastic carbon cut measures that have since been adjusted. Virus-related restrictions on getting back to work have led to disruptions in global supply chains, including shortages of critical components such as semiconductors.

General uncertainty about work and income reduces people’s desire to spend. Beijing’s actions on the dependence of real estate developers on debt also affect the perception of wealth by households, as most of it is associated with real estate.

“The recovery in consumption next year will have a very big impact on the economy,” said Jianguang Shen, chief economist for Chinese e-commerce company JD.com, in Chinese translated by CNBC.

Shen said the authorities could increase consumption by following Hong Kong’s example by offering vouchers. This will result in consumers spending money on certain businesses, such as hotels, further stimulated by a tiered structure that will not unlock subsequent vouchers until the first expires or is used up.

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Hong Kong retail sales declined in 2019 and 2020 as protests crippled the local economy even before the pandemic closed the semi-autonomous region from foreign and mainland tourists. Local authorities launched the latest voucher program in August, and retail sales for the year to October are up 8.45% over the same period in 2020.

Retail sales in mainland China fell last year, despite overall economic growth. Comparison with this decline boosted retail sales in the first quarter, but growth has slowed, especially since the summer. Retail sales continued to grow 13.7% in the first 11 months of the year over the same period in 2020.

By sector, consumers have increased their spending on food and clothing, rather than on services such as education and entertainment, according to analysts at Goldman Sachs. They expect the gap between goods and services to narrow slightly next year.

But even with their projections of 7 percent growth in real household consumption next year, by the end of 2022, it will “remain below the pre-Covid trend,” analysts say. They pointed to the flaws in China’s “zero-tolerance” policy for controlling Covid and the downturn in the real estate sector.

The investment bank expects China’s GDP growth next year to slow to 4.8%, down from 7.8% this year.

Real estate needs home buyers

Challenges in China’s burgeoning real estate market This summer caught the attention of global investors as debt-backed developers like Evergrande teetered on the brink of default, raising fears of contagion. Efforts by the government to contain high levels of debt in the industry and soaring house prices have resulted in tightening financing conditions for developers and falling sales and prices.

Real estate will be “the biggest impediment to growth in 2022,” Larry Hu, chief economist for China at Macquarie, said in his outlook report. He expects the number of new homes to be commissioned and space sold to fall at an even faster pace next year, with real estate investment falling 2% after rising 4.8% this year.

“Property policy should move from tightening to easing next year as we expect politicians to defend 5% GDP growth,” Hu said. “The risk is that they might react too late given their unwillingness to use property as an incentive.”

China’s Economic Planning Summit this month did not signal significant changes in real estate policy. Beijing took the position that “houses are for living, not for speculation.”

“It will most likely take several years to solve the problems of the real estate industry,” said Zhongyuan Bank’s Wang. In the meantime, he expects the central government will need to release debt and spend more to help local governments weather the blow to their revenues.

Regional and local governments receive at least 20%, if not more, of their revenues from land sales to developers, according to Moody’s.

The challenge for policymakers is to reduce the level of debt associated with real estate while ensuring that the real estate market does not slow down dramatically.

“Weak market sentiment is also affecting home sales as buyers postpone buying in anticipation of further price declines,” Fitch said in a report last week. The firm expects a 15% decline in value-based home sales next year, which could lead to cash shortages for five of the 40 developers in its rating coverage.

“We expect the cuts in real estate construction to affect related sectors such as steel, iron ore and coking coal, slow overall growth in fixed capital investment and even put pressure on financial institutions,” Fitch said.

With regard to economic policy next year, Beijing stressed that stability is its priority. The authorities also made it clear this year that the quality of growth is becoming more important than quantity.

Columbia University Earth Institute, China Center for International Economic Exchange and Ali Research Institute have attempted to measure this progress with the National Sustainable Development Index. In addition to GDP, the index includes factors such as income from high-tech enterprises, as well as spending on education, welfare and anti-pollution.

According to the latest report this month, the index rose to 82.1 in 2019 from 59 in 2015.


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