China’s economic output will lag behind the rest of Asia for the first time since 1990, according to new World Bank forecasts that highlight the damage wrought by Xi Jinping’s zero-Covid policies and the meltdown of the world’s biggest property market.
The World Bank has revised down its forecast for gross domestic product growth in the planet’s second-largest economy to 2.8 per cent compared with 8.1 per cent last year, and down from its prediction made in April of between 4 and 5 per cent.
At the same time, expectations for the rest of east Asia and the Pacific have improved. The region, excluding China, is expected to grow at 5.3 per cent in 2022, up from 2.6 per cent last year, thanks to high commodity prices and a rebound in domestic consumption after the pandemic.
“China, which was leading the recovery from the pandemic, and largely shrugged off the Delta [Covid variant] difficulties, is now paying the economic cost of containing the disease in its most infectious manifestation,” Aaditya Mattoo, the World Bank’s chief economist for east Asia and the Pacific, told the Financial Times.
China had set a GDP target of about 5.5 per cent this year, which would have been a three-decade low. But the outlook has deteriorated markedly over the past six months.
Xi’s policy of relentlessly suppressing coronavirus outbreaks through snap lockdowns and mass testing has restricted mobility and sapped consumer activity just as China’s property sector — which accounts for about 30 per cent of economic activity — suffers a historic collapse.
The Washington-based group’s latest forecast follows a series of financial institutions, including Goldman Sachs and Nomura, slashing their outlook for next year, too. The rise in pessimism is based on assessments that Xi would probably pursue his zero-Covid policy beyond 2022.
Many economists and analysts had predicted Beijing would significantly increase stimulus measures in response, boosting consumption and accelerating easing measures to help arrest the housing market downturn.
However, Mattoo said that while China had “immense ammunition to provide powerful stimulus”, it appeared Beijing had concluded that fiscal stimulus would be “emasculated” by the zero-Covid restrictions.
The data comes against a backdrop of broader concerns that policies under Xi — who is set to secure an unprecedented third term as leader of the Chinese Communist party next month — are undoing the economic dynamism that began under Deng Xiaoping’s reform era.
The World Bank has also worried that the property slowdown represented a deep “structural” problem. To reduce the immediate risk of contagion from the property sector “turmoil”, the bank said Beijing needed to provide more liquidity support to distressed developers and financial guarantees for project completion. In the longer-term, however, fiscal reforms were needed to give local governments new sources of revenue beyond land sales, including a property tax.
By contrast, economies in east Asia and the Pacific, particularly the export-driven economies of south-east Asia, are mostly expected to grow faster and have lower inflation in 2022.
In Indonesia, Thailand and Malaysia, government fuel subsidies have helped keep inflation low by global standards. Domestic consumption has risen as the region abandoned lockdowns and stricter approaches to managing the pandemic.
At the same time, higher commodity prices sparked by the global energy crisis have boosted the region’s export-reliant economies. Indonesia, a big exporter of coal, last week revealed that exports brought in a record $27.9bn in August.
Some central banks, including Indonesia, Vietnam and the Philippines, have started raising interest rates.
Even so, the region was under less pressure than other parts of the world, said Mattoo. “I think the gradual tightening we’re seeing . . . can be sustained for some time.”
Some of the measures such as food and fuel subsidies, however, could end up being a drag on growth by the end of the year, the bank warned. Price controls distort the market, often helping the wealthy and large corporations while increasing public debt, according to the report.
Already there are signs of stress. Mongolia and Laos have high debt levels — large shares of which are denominated in foreign currencies — and are vulnerable to global inflation and the subsequent exchange rate depreciation.
“I would say that at this stage, this is something that needs to be watched, rather than a source of serious concern,” said Mattoo.