Shanxi province’s GDP was among the fastest growing in China in the first half of 2022, increasing by 5.2% year-on-year. In this Jan. 14, 2022 photo, a robot arm welds the frame of a new energy vehicle in Shanxi.
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BEIJING – Several economists hope China will avoid a Japan-style stagnation if the right policies are put in place.
China’s gross domestic product barely grew in the second quarter as Covid lockdowns stifled growth. These restrictions have been eased. But Covid controls remain an uncertain overhang as the country awaits a quarterly meeting of policymakers scheduled for the end of the month.
But even if Covid restrictions are eased, China still has untapped growth potential for years to come, economists said.
On the one hand, the country’s income levels, and theoretically spending, have a lot of room to grow.
According to World Bank data, China’s GDP per capita in 2021 was less than one-fifth that of the United States, and adjusted net national income per capita was about one-seventh that of the United States.
“Given that there is still room to catch up, China will still maintain 4% to 5% growth over the next five to 10 years,” said Larry Hu, chief China economist at Macquarie . He said there are uncertainties that could affect his estimates, including whether China can shift from relying on investment to consumption for growth.
Another area of potential is China’s plan unify business standards and access within the country, said Dan Wang, chief economist at Hang Seng Bank China based in Shanghai. “Once those barriers can be lifted … that can greatly increase revenue.”
He pointed out how current practice can favor a company from a local city over one from another province. He pointed to a clear example of such regional biases occurring this year when different Covid rules between provinces created inefficiencies.
Wang said overseas demand and increased manufacturing investment in China could support growth in the coming years.
Much of the country’s official economic narrative has emphasized the “unexpected” impact of Covid and the “Russia-Ukraine conflict”, while noting that inflationary pressures are much higher in countries like the United States.
Asked whether China would face a Japan-style economic stagnation, Bank of China chief researcher Zong Liang dismissed the possibility. He said that China, among other things, has maintained control over its currency, while the Japanese yen has fluctuated too quickly.
Zong also noted China’s investment and self-sufficiency in technological innovation. As for short-term economic growth, wait stimulus announced in May will take effect in the third or fourth quarter, with some benefiting from increased trade under new regional free trade agreements.
However, Zong said China faces similar challenges to Japan when it comes to the housing market.
Beijing has tried to crack down on speculation in the market in recent years. But an underlying and more difficult issue for real estate is the aging population, an issue “that deserves our attention,” Zong said in Mandarin, according to a CNBC translation.
Others, however, are less optimistic.
“China has an even more extreme version of Japan’s imbalances,” Peking University finance professor Michael Pettis said in an email, making it harder to rely on consumption for growth.
Japan’s economy has stagnated, generally growing more slowly than the US and China since the 1990s, after a stock and property bubble burst.
Japan grew rapidly in the 1970s and 1980s thanks to high export growth and investment in infrastructure, but by the early 1990s the country was increasingly investing in wasteful projects, Pettis said.
He said Japan has been unable to turn to its consumers to drive growth, mainly because the manufacturing sector has not been able to accept the necessary transition to higher wages.
China will not necessarily follow the path of Japan, if China can make substantial changes to its political institutions, Pettis wrote in April.
But he said the more likely scenario is that China will not go into a financial crisis or a sharp economic crisis, but is more likely to “face a very long, Japanese-style period of low growth.”
If non-productive investment, mainly in infrastructure and property, is reduced and not replaced by an equivalent source of growth, Pettis estimates that China’s GDP would grow no more than 2% to 3% annually in the coming years .
For this year, many investment banks have cut their China GDP forecasts below 4% in light of the country’s zero-Covid policy.
“Economists cannot solve this problem,” said Xu Hongcai, deputy director of the Economic Policy Commission of the China Political Science Association. That’s according to a CNBC translation of his Mandarin remarks.
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Xu struck a pessimistic tone, noting that monetary policy and fiscal policy can contribute little and that increasing their scale would only add to long-term problems.
Trouble in China’s massive real estate sector has also resurfaced this month, with many home buyers refuse to pay their mortgages until developers find the resources to finish building apartments.
More state support?
Ultimately, however, China’s economy may have to turn to its government for help.
After warning about the risks of excessive government support in his 2016 book “China’s Guaranteed Bubble,” author Zhu Ning said last month that the best solution to the problems of unemployment and real estate bubble is to increase state support.
“The situation in Japan may be a reason to justify a more economic planning approach,” said Zhu, a professor of finance and deputy dean of the Shanghai Advanced Institute of Finance. “[I] can’t think of a market-based approach.”
He said that just as Japan built its social safety net during a bubble period, China should put more resources into ensuring three basic needs: housing, health care and education.
Relieving Chinese consumers of those costs could encourage them to spend, Zhu said.