The turmoil in China’s economy has again attracted global attention following the mortgage strike by the buyers of the unfinished projects around the country.
The Asian Development Bank has recently released its Asian Development Outlook 2022 Supplement report. The bank lowered its forecast for China’s economic growth from 5% to 4% this year.
Not only the Asian Development Bank. Many other organizations such as the World Bank, Goldman Sachs and Nomura, as well as think tanks or economists, have also significantly revised down China’s economic growth forecasts.
The main reason they all cited is the zero-Covid policy that the government imposed in Shanghai and other cities that has caused harm to the Chinese economy.
In fact, Chinese Premier Li Keqiang confessed after the National People’s Congress in March that it is not easy for China to achieve the 5.5% growth target this year due to complex environments and uncertainties.
According to Apollo News, from the debt defaults of Chinese real estate developers last year to the lockdown measures in Shanghai this year, plus the surging prices in the world, there has been great uncertainty for the economy’s prospects.
When the economic uncertainty increases, manufacturers and consumers’ expectations for the future will be dampened. In turn, they will affect the decisions on manufacturing and consumption, and eventually increase the turmoil of China’s economy.
Before Shanghai started its lockdown, China was adopting a loose monetary policy although the global central banks began to pay attention to inflation and adopt a tight monetary policy. It shows that China wanted to increase liquidity to maintain economic stability more than to focus on controlling domestic prices.
But this time, because the inflation faced by various countries comes from surging global prices of raw materials and energy, China is facing no less pressure than other countries.
However, the Chinese government chose to sacrifice domestic price stability in exchange for liquidity in financial markets, its internal economy is facing more important issues than rising prices that require policy intervention.
The loose monetary policy has some effects on the Chinese economy. Firstly, domestic consumption faces the negative impact of rising prices on consumers’ disposable income.
Secondly, the capital market faces the pressure of capital outflows that continue to widen the gap between the interest rates of the U.S. dollar and the Chinese yuan.
Thirdly, loose monetary policy can help the manufacturers, creating a large number of employment and avoiding economic and social instability in China.
If the benefits of the last effect outweigh the first and second, China’s approach may help its businesses navigate the crisis of mismanagement.
However, if Chinese companies with poor management could not exit the market in the face of an economic downturn, China’s financial market will become more unsound.
In this context, China is expected to see lower consumption and investment from the private sector. The driving force of China’s economic growth will inevitably rely more on the government’s consumption and the investment of state-owned corporations.