China’s economy has come to a turning point. These themes offer clues for what to come.
By XIN Yuan, FAN Xu, WANG Yu
2021 was an eventful year for the Chinese economy. Policies were passed to cut carbon emissions as well as house prices. Exports soared. So did energy prices. The debate on tightening or loosening is only getting more heated, as the pandemic continues. It’s hard to make predictions but looking back may shed some light on the future. Here are ten important themes of the Chinese economy in 2021.
China aims to narrow the gap between rich and poor while sustaining fast growth. China’s per capita GDP, currently US$10,500 (66,868 yuan), is still far below most of the EU and North America. The Gini coefficient has risen to 0.482, surpassing EU’s 0.3 and on par with that of the US, signaling a high level of inequality.
Significant progress can be made by improving agricultural productivity. The average income in agriculture (48,540 yuan) is about a fourth of that of tech (177,544 yuan). Regional differences are huge, too. The poorest provinces, many in the west, generate less than a third of the economic output as those on the east coast.
In addition to increasing productivity, the government has been trying to narrow the wealth gap through tax reforms and other redistribution mechanisms. Notably, large companies and wealthy individuals are encouraged to contribute more to the cause through charity and philanthropy, known as “third distribution.”
China announced in May that it would allow couples to have up to three children to boost the birth rate. Births dropped again in 2020 to 8.52 per every thousand people, the lowest on record. Without intervention, China’s population will start to shrink later this decade, putting more pressure on an aging society already dealing with labor shortage.
China has canceled penalties for couples who have more children than allowed, but to encourage births, more needs to be done to lower the cost of child rearing. This means more accessible healthcare, more affordable housing, and more equal education opportunities. The central government has expanded insurance coverage for prenatal care and childbirth, and in a more controversial move, cracked down on off-campus tutoring to ease the burdens on children and their families. Other measures, such as child care subsidies and extended maternity leave are also under discussion at local levels.
Policymakers have been trying to cool the real estate market for years with mixed success but things are different this time. Since April, local authorities have passed over 600 measures that make second home buying difficult. For the first time, sales volumes dropped, with price increases slowing or even reversed in some places.
On the supply side, real estate auction rules were adjusted this year to discourage land hoarding. This, combined with set-aside quotas for affordable housing as well as expectations of more cooling measures to come, has dampened developers’ enthusiasm for buying land. Many are holding cash in anticipation of slowing sales, tighter financing, and an uncertain macroeconomic outlook.
The real estate market plays an outsized role in China’s economy. The government, hoping to provide affordable housing, stabilize the financial market and keep speculation in check, all at the same time, is closely following price signals and sending its own at the same time.
Exports exceeded expectations again in 2021 and remain the main driver of economic growth. From August to year-end, exports rose by more than 20 percent every month - the increase in July was 19.3 percent - far above the 5-10 percent forecasts.
As factories in Southeast Asia suffer frequent lockdowns, orders are directed to China to meet increasing demand fueled by reopening and recovery in western countries. Inflation worldwide also pushed up export values, even as volume growth slackened slightly toward year-end. The situation is unlikely to change in 2022.
Whispers of stagflation are getting louder as economic growth slows and prices go up. China’s GDP grew at 4.9 percent in Q3, the lowest since reopening, while the producer price index (PPI), which measures the cost of raw material, keeps breaking record highs. The consumer price index (CPI), on the other hand, hasn’t risen significantly, further muddying the water.
Economists have attributed slow GDP growth to regional Covid-19 outbreaks and a cooling real estate market. Another culprit is the global energy shortage, which caused hikes in energy prices and power cuts. Small to medium sized companies suffered the most. The Purchasing Managers Index for small businesses was under the 50 threshold for seven months, indicating business contraction. The figure rebounded to 50.1 in November.
Large consumer product companies have adjusted up wholesale prices, putting pressure on CPI, although most of the cost increases have been absorbed by retailers for now. The National Bureau of Statistics said the stagflation-like symptoms are transitory and would be alleviated by expanding food (especially pork) supply.
2021 is the first year after China made its pledge of carbon peak by 2030 and carbon neutrality by 2060. The country has enlisted a set of financial tools to incentivize emission cutting. The carbon market was launched in July. The central bank also set up loans to help companies transition to clean energy.
Much more needs to be done. Energy-intensive industries, many based in underdeveloped western provinces, still run on fossil fuels. Some coal power plants set unrealistic emission-cutting goals and are already suffering from the financial consequences. Policymakers also worry about the manufacturing sector losing its cost advantage during the transition to green energies, although industries that successfully make the switch will eventually benefit from a greener energy structure. The balance between economic growth and emissions will keep shifting as China nears 2030. In the meantime, demand will rise, creating new jobs and even spawning entire industries.
Energy shortages led to power cuts in more than ten provinces in Q3 and Q4, forcing factories to operate at reduced capacities or even shut down just when they were trying to dial up production to meet strong export demand. Extreme weather added salt to the injury. And the problem was further complicated by newly issued energy efficiency goals in some places.
The government told coal producers to increase output, and allowed power plants to charge higher prices to incentivize production. The National Development and Reform Commission reported in November that coal stocks were replenished and would be sufficient for 23 days.
The next step will be to open up the power market and introduce time-of-use rates that allow supply and demand to adjust in real-time.
Fiscal spending hasn’t been as liberal as hoped in 2021. Investments in roads and agriculture declined, in some months by more than 30 percent, which is often cited as a contributing factor to slow economic growth. Fundraising was slow, too. Around 45 percent of local government debt this year was issued between September and November, but it will not be until next year when the money is dispensed.
In contrast, spending on education, social security, job creation, and healthcare increased rapidly. Approval and funding were expedited too. The annual 2.8-trillion-yuan direct funding budget was given out to towns and cities by September, 72 percent of which was spent on pensions, education, job creation and affordable housing. This also included 396.7 billion yuan to support private businesses. The Ministry of Finance recently approved a 1.46-trillion-yuan target for local government bonds next year, signaling slightly more liberal but still cautious fiscal policies to come.
The People's Bank of China (PBOC) is easing monetary policy as most of the world tightens the money supply to tackle inflation. The reserve requirement was cut twice this year, and the lending benchmark (one-year loan prime rate) was lowered by 5 basis points in December, the first time since May last year when the economy first reopened.
China is inclined to use a mix of tools rather than lower interest rates alone, hoping to better target priority issues while fending off inflation risks. To support small businesses, for example, it approved an additional 300 billion yuan of microloans and extended a loan repayment program for them.
SUN Guofeng, head of the central bank’s monetary policy, said in October that China will continue to pursue a normal monetary policy and prioritize economic stability. Although PBOC has been closely following its counterparts around the world including the Federal Reserve, its policies will be mainly driven by China’s own economic conditions and not be swayed by monetary tightening elsewhere. Analysts expect the money supply to be further loosened up in 2022, possibly with more rate cuts.
Pork prices dropped to 23.9 yuan per kilogram in December, 45 percent lower than that of a year ago. While hog stocks have fully recovered from the swine flu outbreak two years ago, demand is weak as a result of restaurant shutdowns. Despite moderate price increases in November, which analysts believe are seasonal and temporary, low prices are likely to last well into Q2 next year.
Hog farmers are barely breaking even at current prices, causing concerns for future price swings. (The industry uses hogs to corn ratio to measure profitability. Farmers break even when hogs are sold for six times or more than the corn used to raise them. The ratio is below 6 right now.) The government is watching closely and will reduce hog stocks to stabilize the market if needed.