MNI INTERVIEW: China Should Grow 5% But Property A Drag-Hofman

China should achieve growth in line with expectations of about 5% this year, but a post-zero-Covid consumption-led rebound will be constrained by a continuing house price downturn and high youth unemployment, former World Bank Country Director in China Bert Hofman told MNI.

While Hofman expects China to achieve what is likely to be its growth target, likely to be announced in March, of around 5%, he added that the property sector will continue to be a “downward drag on the economy” for some years as authorities oversee its restructuring. Home prices in large cities dropped by 1.6% y/y in November 2022, the seventh month of declines, official data showed.

“When the real-estate sector recovers it's going to be smaller and less profitable,” said Hofman, who expects social and rental housing to become more prominent, and longer-term investors such as pension funds to get more involved in financing.

While some advisors have called for the authorities to target growth of up to 7% for 2023, Hofman said the property drag will constrain the release of excess household savings, which have accumulated over three years of zero Covid policies and are expected to be the main driver for growth this year as exports decline due to softening global demand.

“In China the correlation between the real-estate sector and consumer confidence in the wider economy is more sensitive than most countries” said Hofman, whose World Bank research concluded downturns in house prices led to above-average falls in consumer spending. (See MNI: China’s Property Financing Plans Confront Collateral Test)

YOUTH UNEMPLOYMENT ANOTHER DRAG

Another drag will come from unemployment, which Human Resources Minister Wang Xiaoping recently told state media would “remain under pressure” in 2023 due to structural issues. Urban joblessness rose to 5.7% in November, the highest since last year's Shanghai lockdown, and youth unemployment remained high at 17.1%.

“High youth unemployment impacts more than only the spending habits of young people” Hofman said, “it saps everyone's confidence when you see younger relatives graduating without a job”, adding that “people will not be willing to spend as much as a result.”

But the low base comparison with 2022 and some “revenge spending” given the abrupt end to zero covid should drive growth to around 5%, he said.

“Also, another year of strong infrastructure spending is planned and this will support growth, albeit with increasingly diminishing returns”, he said, highlighting that “the potential for investment in green infrastructure spending in China is substantial and could be highly productive in the long run.”

Further ahead, a boost to the economy could come if Beijing manages to join the Comprehensive and Progressive Agreement for Trans-Pacific Partnership. This is “entirely possible,” said Hofman, pointing to China’s drive to repair some of its foreign relations and the recent warming of relations with CPTPP member Australia.

“Many people said China wouldn’t be able to join RCEP - another Asia Pacific trade pact - but they managed to get over the line, and the same could happen this time as well” said Hofman, noting that CPTPP admission was highlighted at China’s recent Central Work Economic Conference, which sets the tone for government policy.