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Forum: Chinese economy outlook 2023

After a tough 2022, China will move toward recovery in 2023, amid stagnation in the US and deep recession in the eurozone.

Battered by domestic challenges and disruptive external headwinds, the Chinese economy has coped with a tough year. The lockdown of Guangzhou’s transportation hub, and the latest wave of novel coronavirus cases in Beijing and other major cities highlight the most recent challenges.

And if it’s been a hard year for China, it’s been worse elsewhere, thanks to misguided economic policies and ill-advised geopolitics. The risk of recession casts a dark shadow over the US, which remains deeply polarized. The eurozone is facing a deep recession, Japan’s economy is shrinking, and the United Kingdom is struggling with the worst fall in living standards since records began.

Amid this dire international landscape, China’s recovery would help brighten the global economic prospects.

From headwinds

Until the fall, China’s economic data has reflected challenges. Retail sales and domestic tourism have slumped, mainly because of recurrent lockdowns. That’s the net effect of mobility restrictions, which undermine effective demand.

The reverse side of reduced consumption is rising household deposits and falling equity markets. When people feel uneasy about the future, they save rather than consume, while businesses defer investment decisions and investors flee to liquidity.

Industrial production has moderated, due to supply-chain disruptions among the provinces. While automobile and new electric vehicle production signals progress, the double-digit fall of the semiconductors is the direct result of US-led geopolitics. In turn, the slowing growth of exports reflects recessionary risks in the US and the European Union, two of China’s major trading partners.

Following several years of adverse liquidity in the real estate sector, the new property market support measures, particularly the government’s 16-point recovery plan, will contribute to stabilization. While default risks remain elevated with weaker developers, larger quality developers will benefit from consolidation. Through the year, investment, fueled mainly by the public sector, has offset effective demand, as evidenced by higher output in steel and new renewable projects. That will add to debt pressures, particularly at the local level. Meanwhile, the Fed’s aggressive tightening has complicated the environment for the People’s Bank of China to make its prudent monetary policy more flexible.

To recovery

Yet, the real story of 2023 is likely to be the impending recovery of the Chinese economy. A central determinant in unleashing the Chinese consumption potential, private sector investment and investor confidence hinges on the fine-tuning of the dynamic clearing policy to COVID-19 cases and the consequent broad-based recovery.

Though gradual, the implementations of new rules to better balance the pandemic fight and economic development could result in a surge of pent-up demand by the second quarter of 2023. Such progress would strengthen economic data. Retail sales would climb. Consumer confidence, even domestic tourism, would pick up with rising consumption, including (costlier) consumer durables, while household deposits would decrease accordingly.

Businesses would invest more, including foreign multinationals as their home markets in the West will stagnate. Property markets would gradually normalize and also benefit from pent-up demand. Chinese investors would return to equity markets, which would also be attractive to overseas investors seeking diversification. The MSCI China Index heralds the turnaround; it was up 24 percent in November, compared to only 2 percent for the S&P 500 Index.

Industrial production would pick up. Despite demand destruction in the West, the Belt and Road Initiative will promote steady progress on the back of recovery in Southeast Asia, which China is both driving and benefiting from. Less fixed asset investment by the public sector would reduce local governments’ debt pressures.

Downside, upside

In a downside scenario, domestic woes would prove more adverse because China would shun away from reforms and opening-up policies. This undesirable scenario is aggressively propagated by neoconservatives in the West, although it has nothing to do with facts.

In reality, both reforms and opening-up policies will continue in China.

Certainly, domestic challenges will remain tough. The population is aging. The economy needs to move from investment toward consumption. Despite decelerating economic growth, per capita incomes must continue to rise. Worse, these challenges must be met amid the West’s purposeful efforts to undermine such efforts.

Yet, in each case, policymakers have shown willingness to rely on reforms to overcome challenges. The aging-related reduction of the labor force will be significantly smaller than expected, as the new UN projections attest.

Furthermore, the share of investment to GDP likely peaked at 42 percent in the past half a decade, with a gradual decline set to ensue.

And thanks to continued reforms and “common prosperity” policies, Chinese catch-up in productivity and per capita incomes has climbed to more than one-third of the US level, even as secular growth is decelerating to 4 percent in the late 2020s.

A brighter outlook

Analysts estimate China’s GDP growth for 2022 will be 3 to 3.3 percent. Then again, the growth rates of all major economies have been downgraded for 2022.

The real story is that, thanks to the expected rebound, China’s growth could climb to 4.5 percent to 5.0 percent in 2023. The precondition is that prevention and control policies will continue to be refined to make them more agile and flexible and the global landscape remains manageable, as indicated by the easing of Sino-US tensions after the recent meeting between President Joe Biden and President Xi Jinping.

With recovery in 2023, China’s long-term development goals — primary modernization by 2035 and modernization in all respects by 2050 — remain attainable within schedule.

Balanced approach to real estate

The report of the 20th National Congress of the Communist Party of China pledged to adhere to the principle of “housing is for living in, not for speculation”. Meanwhile, the nation also strived hard to stimulate housing consumption by adopting a series of incentive policy tools including lowering the transaction tax rate and relaxing the down payment ratio for mortgages. Although that might appear contradictory, it is not a contradiction to encourage appropriate housing consumption while curbing real estate speculation, since both approaches serve the general development goal of “providing all people with adequate housing”.

How is the housing market likely to develop in 2023?

Nationwide, the overheating of the Chinese real estate market has come to an end. Since the principle of “housing is for living in, not for speculation” was first proposed at the Central Economic Work Conference in 2016, the expansion of real estate development in China has significantly slowed. With the massive housing construction in the past two decades, the overall housing shortage has been generally eliminated. Data from the Seventh National Census shows that by the end of 2020, the housing floor area per capita in urban China had reached 38.6 square meters, with 72 percent built after 2000, which means the majority of the existing housing stock can basically meet modern living needs in terms of function, and the real estate industry should move into a new phase of upgrading and restructuring.

On the other hand, although the urban housing supply seems sufficient in terms of the statistical total floor area, there remain many structural issues to be refined. With the growth of the Chinese economy and the improvement of people’s income levels, residents’ aspirations and pursuit of better living conditions will not cease, and the modernization standards of housing will also continue to rise. Thus, the real estate industry will continue to be a significant driving force for the economy, with large investments required in the renewal of housing stock and the construction of public service infrastructure.

According to data from the Seventh National Census, by the end of 2020, 27.56 percent of the 29.5 billion square meters of housing stock owned by households in urban areas nationwide was built for more than 20 years, which means that 8.2 billion square meters of old housing stock will need to be renovated. Even if we conservatively calculate the renovation cost at 1,000 yuan ($140) per square meter, the investment demand still adds up to 8 trillion yuan. It is also noteworthy that renovation is a long-term demand since the housing stock will continue to age and deteriorate over time. In fact, as people’s living standards continue to rise, a total of 52 billion square meters of housing stock nationwide, in both urban and rural regions, will require regular checkups and demand large funding for their maintenance. Investment in the renovation and redevelopment of housing stock will continue to be a key requirement in the future.

Considering the current macroeconomic background and the housing market conditions, in the next stage of real estate development, the government should strive to maintain a high-quality housing supply while also adhering to the principle of “housing is for living in, not for speculation” to avoid potential risks of financial bubbles and social instability. It is necessary to seek a new housing model that meets the two purposes simultaneously.

First, the Chinese government will continue to resolutely curb the speculation in housing to prevent bubbles and restrain the financialization trends. During the past six years, the government has used a combination of regulatory instruments to curb excessive speculation in commodity housing, and a certain degree of balance has been formed between the financial sector and the real estate market. It is reasonable to expect the policy to be sustained in the long run. However, in large cities with big population inflows and high economic growth, housing speculation is still prevalent. Appropriate tax and transaction restrictions are expected to be implemented to weaken the appreciation expectations.

Second, pluralistic entities will be encouraged to engage in the provision of high-quality housing to fill the supply gaps in large cities with population inflows. In addition to curbing speculative demand, supply-side reform is also an important aspect to tackle the soaring housing price. Recent policy developments have indicated that the government will combine the policy tools of planning, finance, taxation, and administration to encourage the construction of small apartments and rental housing, leveraging the power of enterprise and society. Recently, with land planning alterations, tax relief and other policy encouragements, many State-owned and even private enterprises have participated in the construction and operation of subsidized rental housing.

Third, the government will develop a multi-channel housing affordability system, in response to the diversified housing needs of disadvantaged people at different stages of their life, securing their right to adequate housing and thus providing individuals with equal opportunities and resources to achieve their personal development. Housing support for young people and new urban residents can help them share in a city’s job opportunities and social benefits, thus enabling the realization of common prosperity.

Job policy must work smarter, not harder

Currently, China’s job market is facing prominent structural contradictions. On the one hand, the shortage of labor in the manufacturing sector cannot meet the demand of the real economy. On the other hand, it is difficult for college graduates to find suitable jobs.

China’s job market will be under more pressure due to the high youth unemployment rate and the large number of university graduates in 2023. The economic headwinds and the supply and demand situation in the labor market require the country to introduce innovative supporting policies to stimulate the vitality of enterprises and help workers upgrade their skills.

According to the National Bureau of Statistics, China’s unemployment rate for people aged 16 to 24 remains high this year due to cyclical, frictional and structural challenges. It peaked at 19.9 percent in July, dropping to 17.9 percent in October. At the same time, the manufacturing industry is facing a labor shortage, which not only affects the current development of the real economy, but also slows the development of the innovative economy.

A record 11.58 million graduates will stream out of colleges in 2023 and they will face a tougher employment situation. College graduates represent a high-quality labor force. Their underemployment or long-term unemployment will affect socioeconomic development. Long isolation from the labor market will affect the accumulation of human capital and the long-term career development of graduates.

From the perspective of economic development, the transformation and upgrading of China’s manufacturing industry is at a critical stage.

Skilled workers are urgently needed for the construction of a modern industrial system and the formation of an innovation economy. The long-term labor shortage will inevitably hinder China’s development.

However, structural contradiction in the labor market is unavoidable in the development progress. Since its reform and opening-up, China’s manufacturing sector, especially the labor-intensive industries in the coastal areas, has achieved rapid development thanks to sufficient labor, opening-up, foreign investment and technology imitation. When factory jobs were abundant, a large number of uneducated and unskilled workers could still find relatively well-paid employment. The industrial model and labor supply matched each other, making great contribution to China’s economic development in the past decades.

However, the nation’s economic development mode has changed profoundly. The increase of labor costs and industrial transformation demand skilled and educated workers, yet the labor force has shrunk in size due to low fertility and population aging. Supply and demand in the labor market will continue to decrease, but the structural contradiction in the labor market will become prominent and complex due to the diversified labor force structure.

In addition, the COVID-19 pandemic has long-lasting effects on the job market. At present, the Chinese economy faces multiple pressures including demand contraction, a supply crunch and weakening expectations, so employers are cautious amid uncertainties. Yet once they are adversely affected, market entities find it difficult to recover even if the external environment improves.

Therefore, macroeconomic policies should be adopted to promote high-quality employment. In the past, policies were introduced to protect the large number of low-skilled workers. But China has entered a new stage of development, so more effective macroeconomic policies, ranging from financial subsidies, tax relief and deferred payment of social insurance premiums, are expected to support labor-intensive enterprises to expand recruitment.

Besides, enterprises should be incentivized to pursue innovation and transformation. Implementation of industrial, fiscal and monetary policies will bolster the development of modern industrial systems, an innovation economy and high-quality employment.

It is more difficult for young people, especially college graduates, to find suitable jobs because they face longer “frictional unemployment” (the time gap between a person voluntarily leaving a job and finding another).

An employment “buffer zone” should be created to ensure frictional unemployment problems do not become long-term structural unemployment problems.

Hence, related departments should establish a service system for college students after their graduation, and provide services such as libraries, study rooms and employment guidance to create a stable and sound environment for graduates to adapt to the labor market or continue higher education.

The government should build talent pools and help emerging industries create jobs to match the supply and demand of youth employment.

As employers’ skills requirements change rapidly, it is necessary to improve the top-level design for higher education and even the entire education system. Besides increasing college enrollment, the authorities also need to improve the quality of education. The majors and enrollment plans of universities should target future skills likely to be in demand in the labor market.
Source: China Daily

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