MNI: China's Rebound At Risk From Balance Sheet Recession

Economic scarring inflicted by three years of Covid, coupled with weak balance sheets and lower productivity, risks undermining the government’s push to deliver growth of over 5% and its long-term ambition of high-quality development, policy advisers said.

Balance sheets of small businesses and households will take time to repair after the three-year pandemic shock, which will make it difficult for China’s economy to rebound quickly, said Wang Yiming, a member of the PBOC’s monetary policy committee.

He said small companies had suffered sharp declines in profits, which had made them hesitant to expand and invest, while the household sector had become more cautious on spending given rising unemployment and falling incomes. (See MNI: Growing Chinese Savings Seen Hard To Boost Consumption)

Additionally, real estate developers who had suffered a contraction in demand had yet to see a turning point in the property market, Wang said, noting that property investment would barely rise this year.

Wang forecast the world's second largest economy would see a strong rebound in Q2 due to a low comparison base last year, then enjoy a sustained recovery that delivered GDP growth of over 5% for the whole year.

The recent “two sessions” for local governments, the first after a reshuffle of local officials, sent signals about likely national economic targets which are due to be announced at the National People’s Congress in March. The weighted average of local government GDP growth targets was 5.6%, with policymakers set to focus on relaxing property regulations, expanding infrastructure, and boosting consumption to reach their targets.

The biggest problem confronting the economy is sluggish demand, meaning authorities should prioritise consumption via expanded public spending, increased credit to support house and electric car purchases, and an accelerated resumption of tourism and catering services, Wang suggested.

ECONOMIC SCARRING

Guan Tao, global chief economist at BOC International, said boosting domestic demand depended on preventing balance sheet recessions among both companies and households that paused adding leverage in recent years because of a more cautious mindset, reflecting “economic scarring” caused by the hit to incomes and confidence caused by the pandemic.

He warned the rebound in the service sector and consumption after the lifting of pandemic controls would not offset the losses incurred by SMEs in recent years, while household would be wary of running down their savings given the pandemic and other uncertainties.

He said a financial recovery among small companies, which are major job creators, and medium and low-income households, which are the main contributors to consumption, should be closely watched.

Guan called for stronger policy support to boost confidence in investment and consumption, which would be decisive to a sustainable rise in Chinese asset prices. He said any policy that could hurt private companies’ sentiment should be avoided. (See MNI PBOC WATCH: LPR On Hold, But Ample Tools To Boost Growth)

He cautioned that excess policy stimulus could fuel inflation should the potential growth rate keep falling, which would require policymakers to deftly balance the three targets of stabilising growth, employment, and inflation.

PRODUCTIVITY HIT

China’s potential GDP averaged 5.6% from 2020 to 2022 compared with 6% in 2019, said Zhu Baoliang, chief economist at the State Information Center. Considering actual GDP growth averaged 4.5% over the past three years, the 1.1 percentage point gap was largely due to the pandemic, he explained.

The pandemic also hurt China’s productivity growth. Total factor productivity (TFP), which measures gains in economic efficiency, declined 2% last year, indicating less quality economic development, Zhu pointed out. He estimated China’s economy would grow over 5% in 2023 compared to 3% last year, with 1.5 percentage points coming from a rebound off a low comparison base.

Xu Hongcai, deputy director of the economic policy committee of the China Association of Policy Science, suggested fiscal policy would provide broad stimulus, while monetary policy should focus on targeted tools and that an across-the-board easing may not have a big space.