The economic crisis that hangs over China threatens to knock down its growth for this year. The International Monetary Fund (IMF) has cut its growth forecast for the country to 4.4%, while other analysts forecast figures below 4%. Foreign investors have dumped $18 billion in Chinese bonds and more than $7 billion in equities in March alone.
The main obstacle facing the Chinese economy is the crisis in the real estate sector, which represents up to 29% of GDP. The problem has turned out to be worse than expected since the crisis of the . The contagion has spread and at least 10 Chinese developers have defaulted on their dollar debt, causing panic among international investors.
Meanwhile, President Xi Jinping’s crackdown on the Chinese tech sector has reduced the capitalization of China’s 10 largest tech companies by more than $2 trillion in the past year. The consequence is that these companies are currently laying off thousands of workers.
Another sticking point is the war in Ukraine. The Russian invasion has sent energy and commodity prices skyrocketing in China as well, and has crippled supply chains, which had already been affected by the pandemic. China is the world’s largest manufacturer, exporter and consumer of energy.
On the other hand, Beijing has once again tightened its restrictions due to Covid. Xi Jinping declared “victory” over the virus last year. However, some 373 million people in 45 cities have been under some form of lockdown since the end of April. Those places account for about 40% of China’s total economic output, or about $7.2 trillion of annual GDP.
The combination of these problems is enough for Beijing’s target – which estimates a GDP growth of 5.5% this year – to disappear.
To control this situation, . For example, in the first months of 2022, local governments accelerated the issuance of special purpose bonds (SPB), an important source of financing for infrastructure investment. Beijing has also promised more tax cuts for businesses, deferred plans to expand a pilot property tax program and is gradually easing restrictions on the real estate market. Meanwhile, policymakers have launched support measures for various industries, including the service sector, to cushion the impact of the pandemic.
The impact on growth of the new restrictions in China may drag down the rest of the economies. The latest international forecasts warn of this matter. In its latest updates, the World Bank (WB) forecasts that China will grow by 5.1%.
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