Bloomberg: China shifts from Covid Zero policy to economic stimulus

13 December 2022 228
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Source: Bloomberg

Authors: Bloomberg news

Article: Original article

Publication date: Tuesday, December 13, 2022

China's sudden termination of its Covid Zero policy brings more uncertainty to an already fragile economy, increasing the possibility of easier fiscal and monetary policies to support the growth of gross domestic product (GDP).

That’s the view of economists, who expect President Xi Jinping and his officials to specify next year’s goals at the Central Economic Work Conference (CEWC). The target of GDP growth rate for the upcoming year is likely to be discussed as well, but it won’t be revealed till next March.

Officials must now attempt to reverse some of the economic damages caused by three years of Covid restrictions and the worst downturn in the real estate market in modern history, which altogether have undermined the trust of consumers and businesses.

The CEWC will start on Thursday. On the same day, the government will present November’s economic data, which are expected to show a strong decline in retail sales and a slowdown in industrial production against the background of the latest wave of Covid.

High-ranking officials have been discussing the next year’s GDP growth rate of about 5%, however, some of them advocate the position that a comparatively high target might help with shifting the focus from Covid controls to the growth of the economy.

According to Bloomberg’s survey among economists, China’s GDP will rise to 4.9% in the upcoming year, even though an increase in Covid cases makes these predictions quite uncertain.

This year, the economy is expected to rise by 3.2% only, the lowest growth since the 1970s, excluding the pandemic fall in 2020, therefore, policymakers are forced to stimulate it in the following year to achieve longer-term goals.

Chinese analysts encourage the central government to increase its official fiscal deficit and sell more bonds in order to stimulate economic growth and reduce local authorities’ debts. 

According to Goldman economists, monetary policy easing is likely to come at the expense of some structural tools, such as re-lending for the economy’s vulnerable sectors, rather than through broad rate reductions. That’s driven by the fact that GDP growth should rebound next year, while inflation could rise when Covid controls are loosened.

Duncan Wrigley, chief China economist at Pantheon Macroeconomics, said that he expects the CEWC to highlight the support of domestic demand. It’ll provide additional help, such as a partial cancellation of restrictions on purchasing real estate in big cities and mortgage easing.

The real estate market is experiencing its worst recession in modern history after the government’s crackdown on speculation and increased debt risks for property developers. In November, the downturn showed little signs of abating, with home sales continuing to fall despite a series of recent supportive measures.

The Politburo of the Communist Party of China made a rare promise to “significantly increase the market’s trust”, raising hopes that more business-friendly and growth-enhancing measures will be adopted. Trust between businesses, consumers, and economists has recently reached an all-time low.

Also, the Politburo announced that local governments will be encouraged to "breakthrough." The seldom-used phrases may inspire local officials to compete for faster economic growth in their regions, with GDP possibly becoming a part of their performance evaluations once again, as stated Morgan Stanley economists, including Robin Xing.

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This content is for informational purposes only and is not intended to be investing advice.

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