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Can China revive growth without reviving speculation?

CHINA HAS not enjoyed much success at the sport of curling, which will feature in the Beijing winter Olympics beginning on February 4th. But China’s economic policymakers could draw inspiration from the obscure event. Like curlers, they have a difficult target to hit: they are thought to be aiming for growth of 5% or more in 2022. And just as the curlers must slide a “stone” (a kind of oversized puck) with enough force to reach the target, but not so much that it crashes off the ice, so China’s policymakers must give a slowing economy enough oomph to grow by 5%, but not so much that it exceeds its limits, contributing to inflation and speculation. Policymakers are grappling with the impact of the Omicron variant of covid-19, which was reported in Beijing for the first time on January 15th. Unlike other countries, China has no intention to “live with” the virus, even if its latest iteration is less severe than earlier ones. A wide-ranging lockdown was imposed on the city of Xi’an in central China after its officials failed to contain a covid outbreak quickly enough. Narrower lockdowns elsewhere have so far left China’s manufacturing supply-chain largely intact. But the country’s overseas customers worry about what would happen if a Xi’an-style lockdown were to be imposed on a city closer to the heart of its export machine. Mandatory testing in the port city of Tianjin, for example, has already forced Toyota to suspend carmaking at its joint venture in the city. How much help does the economy need? According to figures released on January 17th, China’s GDP grew by 8.1% in 2021, its fastest pace since 2011. “Nominal” GDP, which does not adjust for inflation, grew even more quickly: by about 12.6%. And because China’s currency also strengthened, its GDP surpassed $17.7trn (at market exchange rates), an increase of 20% over the year before. Judging by these numbers, the economy would seem to have all the momentum it needs. But the pandemic so weakened China’s economy in early 2020 that the following year was always going to look unusually strong by comparison. As 2021 progressed, growth ebbed. In the last three months of 2021, it was a more modest 4%, compared with the same period of the previous year (see chart). That was higher than expected, but lower than China’s rulers would like. Intermittent restrictions on travel and gatherings have hampered retail spending, which shrank, in real terms, in December compared with a year earlier. Economic growth in the latter part of 2021 was also hurt by coal shortages, environmental limits on energy intensity, regulatory crackdowns on consumer-facing tech companies, and strict curbs on borrowing by property developers, which forced several to default, spreading unease to homebuyers. In curling, teams of skaters frantically sweep debris and other impediments out of the stone’s way to smooth its passage across the ice. In China, policymakers have been doing the opposite, sweeping one regulatory obstacle after another into the economy’s path. What explains this regulatory zeal? After the economy bounced back quickly from the first wave of the pandemic, China’s policymakers may have concluded that it was a good time to curb some of the negative side-effects of growth, such as pollution and property speculation, because economic momentum seemed assured. Exports in particular boomed as people around the world spent less on face-to-face services during the pandemic and more on goods to keep them safe (masks), slim (exercise bikes) and sane (games consoles). But this external source of growth may ebb in the year ahead. Foreign spending may switch back to services, as covid-19 becomes endemic. And even if Omicron keeps people in their shells, there is little reason to expect consumers to binge all over again on lockdown comforts. Customers who bought a games console or exercise bike in 2021 probably will not need an upgrade in 2022. China’s export boom may also be a little less impressive than it seems. In the past, China’s exporters would understate their sales to avoid value-added tax. They now have less reason to do so, because of the more generous tax rebates China offers. If they understate exports less now than in the past, their exports will look as if they have grown faster than they really have. This change in reporting may have exaggerated China’s export growth by more than two percentage points in 2021, according to Thomas Gatley of Gavekal Dragonomics, a consultancy. Somewhat belatedly, policymakers have now realised that growth needs stabilising. On January 17th China’s central bank cut the interest rate on its one-year loans from 2.95% to 2.85%. Another seven-day rate was lowered by the same amount. These reductions follow a cut last month in the reserve requirements imposed on banks. The government is also easing fiscal policy. It has extended income-tax breaks, including favourable treatment for year-end bonuses. It is encouraging local governments to issue more “special” bonds (which are meant to be repaid out of revenues from the infrastructure projects they finance). It is also hastening construction of 102 infrastructure “mega-projects” outlined in the country’s five-year plan for 2021-25. China’s state grid will, for example, build 13 ultra-high-voltage transmission lines in 2022. Increased infrastructure investment could add at least a percentage point to GDP growth in the first half of 2022, according to Morgan Stanley, a bank. Analysts at Morgan Stanley are relatively optimistic about the government’s chances of meeting its growth target this year, as long as policymakers bring about a soft landing for the all-important property market. Home sales fell by almost 18% in December, compared with a year before. To arrest this trend, government officials have tried hard to reassure homebuyers that the flats they have bought in advance will be built, even if the developer that sold them goes bust. Mortgage rates have edged downwards. And a number of cities have experimented with subsidies and tax cuts to encourage homebuying. Rosealea Yao, also of Gavekal, thinks sales will improve in the first quarter compared with the previous three months. But although China’s national rulers are now committed to stabilising the economy, they are still wary of overstimulating property, which is prone to worrying speculative bubbles. Beijing wants local governments to do enough, but not too much. After the northern province of Heilongjiang promised an “all-out sprint” to revive the property market, the exhortation was soon removed from the internet, points out Ms Yao. The measured art of curling, not sprinting, is the better metaphor for the government’s aims.

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