“It’s increasingly feeling like this year will be seen as the long-awaited beginning of China’s very difficult and probably slow transition towards a slower-growing but sustainable economy.”
That’s the recent assessment from Michael Pettis, finance professor at China’s prestigious Peking University. The long-time proponent of demand-side policies—such as boosting consumption—says China can bolster its deteriorating economy with the infrastructure and tax-cut policies it often relies upon. But these measures aren’t sustainable, and they impede rebalancing away from its export-reliant economy.
As draconian lockdowns of the pandemic appear to be slowly unwinding in places like Shanghai, Beijing continues to roll out stimulus measures to ameliorate the damage its zero-Covid policy has inflicted on the economy.
China on Monday said its latest steps include even more business tax rebates, adding 140 billion yuan ($21 billion) in tax cuts to bring the total amount to 2.64 trillion yuan ($400 billion) for the year. Passenger car sales will receive 60 billion yuan in tax reductions, and hundreds of billions of yuan in bonds will be issued to support the aviation and railway sectors.
Leaders again promised to reduce travel restrictions to allow freer freight and passenger transport, though only in low-risk areas, and it completely depends on control of Covid outbreaks.
Additional measures include increasing coal production and issuing government debt to finance infrastructure projects. The few measures targeting consumers were vague and modest, including delaying worker payments into pension funds and extending unemployment insurance.
Looking at Shanghai, Beijing, as well as the important production centers of Jilin and Xi’an—all of which are in or recently out of lockdowns—Meng Lei, China equity strategist at UBS Securities, said in a recent note that “logistical and supply chain disruptions are the biggest pain points that affect production resumption. Therefore, work resumption is likely to be gradual rather than happening overnight.”
On Friday, policy makers surprised observers by cutting a key mortgage interest rate by the most since it began recording such data decades ago, in hopes of boosting a property market that has seemed to be on its last leg for more than a year.
Because of the supply-side support, rather than demand-side measures such as helping households consume, Pettis say this rate cut “can be seen as a sign of distress more than as a sign of hope.”
China’s GDP forecasts for this year have been dizzying for experts, as lockdowns effects lower expectations while the continuous rollout of policy support at least tempers the downward revisions.
In March, leaders set the 2022 GDP growth target at “around 5.5%.” At the time analysts called the goal modest, as it was the lowest target in 30 years, and the worst of the lockdowns had yet to occur. Many now call this goal ambitious.
Goldman Sachs Group last week lowered China’s 2022 GDP forecast to 4% from 4.5%, pointing to grim data for April. In a note, analysts said the lowered estimate even assumed continued substantial government support throughout the year. But positive impacts, if they come at all, will be slow.
“We now expect reopening does not start before 2023Q2 and the process to be more gradual and controlled than previously assumed,” they said.
Morgan Stanley and Citigroup both recently cut their forecasts to 4.2%, citing similar concerns. JPMorgan Chase
—even noting that “the darkest period might be behind us”—went even further, cutting its full-year forecast to 3.7% from 4.3% on Monday, predicting a deep contraction this quarter.
Economist Pettis was at once more optimistic on the GDP number while downbeat about Beijing’s approach to its economic troubles.
“A lot of analysts doubt they can achieve [5.5%], but Beijing still has the debt capacity to achieve GDP growth rates of over 6% if they wanted,” he told Barron’s. “But this wouldn’t be high-quality growth” in areas like consumption, the trade surplus, and business investment. Instead, Beijing’s penchant for business tax cuts and pouring money into infrastructure and property “will not boost the economy’s real capacity to produce goods and services in any meaningful way,” he said.