Mainland China's economy faces two challenges: economic weakness in the near term and a riskier global environment in the longer term. How it responds to these challenges will have a substantial impact on the rest of the region.
Stimulus measures will probably help alleviate the current economic slowdown, to the benefit of China’s neighbours in Asia. Over the longer term, however, China’s reforms could have a more mixed effect on the region.
Necessary action
China’s economy had been slowing since late last year as necessary policy actions to reduce excessive leverage and improve competition and consumer protection took a toll on investment spending. The property market had cooled as a result of stricter controls on lending for home purchases. Rigorous regulatory actions on big tech businesses and others, such as tuition companies, had also slowed activities in those areas.
Government agencies have been rolling out wide-ranging measures to boost the economy
Thus, when stringent public health measures became necessary to contain Covid-19 infections in key economic hubs such as Shenzhen, Tianjin and Shanghai, the economy was highly vulnerable and slowed significantly.
Loss of momentum
Data for April showed a sizeable loss of momentum across industrial production, fixed-asset investment and retail sales. The youth unemployment rate was at a historical high of 18.2% in April. With more than 10 million new graduates expected to seek jobs this summer, the employment situation could quickly worsen.
Not surprisingly, then, the government has been signalling concern over the economy. Prime Minister Li Keqiang warned that the nation’s economic growth target of 5.5% this year was at risk. Consequently, government agencies have been rolling out wide-ranging measures to boost the economy.
Following President Xi Jinping’s call for stepped-up infrastructure spending, the State Council, China’s cabinet, has established a CNY800bn line of credit to finance infrastructure projects. The central bank has cut rates and introduced measures to encourage credit extension to SMEs that were hit hard by the slowdown. Fiscal support has also been expanded, with taxes and fees cut, especially for smaller firms.
Stronger demand
At the same time, as efforts to contain Covid-19 infections have shown results, the government has eased restrictions on activity. By the end of June, most economic hubs will have largely returned to normal – so long as there are no further outbreaks.
The Chinese economy is likely to begin rebounding in the third quarter of the year
Consequently, the Chinese economy is likely to begin rebounding in the third quarter of the year, permitting expansion by around 3% to 4% for 2022 as a whole. That in turn should translate into stronger demand for raw materials and intermediate goods exported by other Asian countries, while also supporting the prices of the commodities they export.
Longer term challenges
In the longer term, and given geopolitical events, China is likely to focus on the following:
- reducing dependence on key components and technology through R&D spending combined with industrial policies to nudge companies to invest in strategic areas. China may also want to ensure that the supply chains in strategic areas such as semiconductors are mostly in China, which could impact other East Asian economies
- stepping up measures to encourage the use of the Chinese yuan to settle trade so as to diminish the dependence on the US dollar
- expanding the Belt & Road Initiative, with a greater focus on Central and South-East Asia so as to woo these strategically important countries.
In short, China’s Asian neighbours have less to fear from the current economic deceleration, which can be turned around. In the longer term, they will see both upsides and downsides from the strategic changes that China will undertake.
