China’s economic output will lag the rest of Asia for the first time since 1990, according to new World Bank forecasts that highlight the damage wrought by President Xi Jinping’s zero-Covid policies and the collapse of the world’s largest real estate market.
The World Bank has revised down its forecast for gross domestic product growth in the world’s second-largest economy to 2.8%, from 8.1% last year, and from its April forecast to between 4 and 5 % for this year.
At the same time, expectations for the rest of East Asia and the Pacific have improved. The region, excluding China, is expected to grow 5.3% in 2022, down from 2.6% last year, thanks to high commodity prices and a rebound in domestic consumption after the coronavirus pandemic.
“China, which was leading the post-pandemic recovery, and largely ignored 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 around 5.5% this year, which would have been the lowest in three decades. But the outlook has deteriorated markedly over the past six months.
Xi’s policy of relentlessly suppressing coronavirus outbreaks through instant lockdowns and mass testing has restricted mobility and undermined consumer activity much like China’s real estate sector – which accounts for around 30% of economic activity – suffers a historic collapse.
The Washington-based group’s latest forecast follows a string of financial institutions, including Goldman Sachs and Nomura, slashing their outlook for next year. The rise in pessimism is based on expectations that Xi will extend his zero-Covid policy beyond 2022.
Many economists and analysts had predicted that Beijing would dramatically increase stimulus in response to weak economic growth, accelerating easing measures to boost consumption and help arrest the slowdown in the housing market.
However, Mattoo said that while China had “tremendous ammunition to deliver a powerful stimulus”, it appeared Beijing had concluded that fiscal stimulus would be “emasculated” by zero-Covid restrictions.
The data comes amid broader concerns that Xi – who is set to secure an unprecedented third term as leader of the Communist Party of China next month – is undoing the economic dynamism that began under Deng Xiaoping’s reform era.
The World Bank has also expressed concern that the housing downturn represents a deep “structural” problem. To reduce the immediate risk of contagion from the “turbulent” real estate sector, the bank said Beijing must provide more liquidity to struggling developers and financial guarantees for the completion of projects. In the long term, however, tax reforms are needed to give local governments sources of revenue beyond land sales, including a property tax.
In contrast, East Asian and Pacific economies, particularly export-oriented Southeast Asian economies, are mostly expected to experience faster growth and lower inflation in 2022.
In Indonesia, Thailand and Malaysia, government fuel subsidies have helped keep inflation low by global standards. Domestic consumption increased as the region abandoned lockdowns and stricter approaches to managing the pandemic.
At the same time, rising commodity prices caused by the global energy crisis have boosted the region’s export-dependent economies. Indonesia, a major coal exporter, revealed last week that exports brought in a record $27.9 billion in August.
Some central banks, notably in Indonesia, Vietnam and the Philippines, have started raising interest rates.
Even so, the region was under less pressure than other parts of the world, Mattoo said. “I think the gradual tightening that we are seeing. . . can be sustained for some time.
Some of the measures such as food and fuel subsidies could, however, become a drag on growth by the end of the year, the bank warned. According to the report, price controls distort the market, often helping the wealthy and big business while increasing public debt.
There are already signs of stress. Both Mongolia and Laos have high levels of debt – much of it denominated in foreign currencies – and are vulnerable to global inflation and subsequent exchange rate depreciation.
“I would say at this point it’s something to be watched, rather than a cause for serious concern,” Mattoo said.