In China, economic growth is expected to stabilize in the coming quarters, after four years of multiple shocks and unusual volatility. Economic growth rates will stay below their pre-Covid level.
The Chinese economy has been hit by many shocks since 2020 : i) first the Covid shock until last December, ii) then the regulatory shock in the services sector. iii) The property market has been hit by a major crisis for more than 2 years. iv) External shocks have hit the export sector in recent months. v) Finally, China has gone through a confidence crisis that has constrained private consumption and private investment.
Given the context, the post-Covid rebound rapidly lost momentum during the first semester of this year. Since last summer, the authorities have adjusted their policy mix and increased the number of monetary and fiscal policy stimulus measures. The Chinese authorities have kept a prudent and incremental approach to policy easing. At the same time, they have maintained their structural goals, especially the goal of reducing financial-instability risks.
First of all, the plan to support the property sector has been aimed principally at funding the completion of construction projects and reactivating housing demand. At the same time, the authorities have continued to constrain property developers to restructure debt and restore their solvency.
Also, the last fiscal stimulus measures have been announced together with measures aimed at tackling the financial difficulties of local governments. In late October, Beijing extended the authorization to front-load the issuance of bonds by local governments. But Beijing also approved an increase in the official budget deficit, which this time will be funded by the issuance of bonds by the central government. This may indicate a change in fiscal management and a willingness to ease the spending responsibilities of local governments.
In addition, a plan has also been launched to reduce refinancing risks and default risks of local government financing vehicles in the short term.
Since last August, economic activity has strengthened again, supported by the accommodative policy mix and driven by private consumption and services. Meanwhile, the property sector has shown no sign of improvement. In the short term, economic growth is expected to stabilize without gaining further momentum. In fact, headwinds remain strong.
In addition there is a risk that weak confidence in the private sector takes root durably due to the now uncertain political and geopolitical environment. Also, Chinese households may remain durably worried due to the property market crisis and high youth unemployment. Therefore, the establishment of a regulatory framework in the services sector that is more stable and less burdensome seems to be needed. This would enable to stimulate private investment, job creation and the hiring of young graduates in high value-added services sectors.
