China: inflation, consequences of Covid-19

Well-known investment banks suggest a slowdown in economic growth in China. High inflation, developer defaults, declining birth rates, and the threat of recession harms the Chinese economy.

According to analysts, China’s GDP growth will barely rise by 4.5% during the year, although government officials are aiming for the 5.5% mark. The strict “zero COVID” policy has caused a shock to the entire economy. We are talking about large cities that have been completely or partially closed. JP Morgan Research predicts that in 2022, annual consumer price index (CPI) inflation will average about 1.7%.

Inflation

Demand for some services and durable goods has dropped significantly in the country. The reason for weak sales is a drop in revenue amid growing uncertainty. The COVID-19 epidemic has been fighting in mainland China since March 2020. Shanghai, which occupies a leading position in terms of cargo turnover in the world, suffered the most. Only at the end of May, a two-month quarantine was lifted here, and life returned to its usual course.

The prolonged isolation has sparked public anger and protests in Shanghai and affected the city’s economy, where manufacturing and exports play a key role, disrupting supply chains around the world and slowing international trade.

Fiscal policy

The fiscal policy of the state also has a great impact on the Chinese economy. JP Morgan has estimated that the fiscal boost from government spending this year will be 0.8% of GDP. A large-scale reduction of taxes and fees for production and small businesses is expected, as well as the transfer of unused budget funds for the previous year. At the same time, monetary policy is likely to be neutral with a downward trend in interest rates.

The structural decline in the housing sector

The housing sector in China is the backbone of the economy, directly contributing 14-15% of GDP. The current situation is similar to a slowdown in the real estate market, but there are also significant differences. The stock of apartments is lower than in 2015, especially in cities with a lower level of development. However, the fundamentals of the housing market suggest that a repeat of the recovery after 2015 is unlikely since most developers are concerned about financing conditions.

Structural decline Unsplash License

The housing market in China is suffering from falling demand. JP Morgan estimates that demand for primary and secondary real estate peaked around 2017. By 2030, this indicator is projected to decrease by 47%. Problems with liquidity and credit from private developers may not be resolved quickly, which will lead to more defaults.

However, experts hope that the real estate market will cheer up, and the government will allocate significant funds for infrastructure investments in the coming months.

The state of the economy of China

In May, economic activity in China revived somewhat after a disastrous April, as COVID restrictions in large manufacturing centers gradually eased, although traffic control continues to restrain demand and production. Factory activity was the highest in three months in May but decreased compared to 2021.

Economy

The end of China’s demographic development in China

The population of China, amounting to 1.4 billion people in 2022, will decrease this year for the first time in 60 years, which will cause profound changes in the global economy, experts from the Australian Victoria University say.

Currently, every sixth person in the world is Chinese. Over 40 years, the population of China has increased from 660 million to more than 1.4 billion people. There are many signs that the baby boom period is over and the Chinese are waiting for a reduction in the birth rate again – for the first time since the Great Famine of 1959-1961.

China
Demographic development

Young couples are in no hurry to have children, despite the easing of politics and the promotion of childbearing by the authorities. According to demographers, the turning point will come much earlier than expected, and the “three children policy” will not change anything.

Increase in social spending

Now there are 20 pensioners for every 100 residents of working age. After 80 years, 120 old people will already be supported. An annual population decline of 1.73% can significantly reduce economic growth. The costs of healthcare, medical services, and care for the elderly will increase.
Despite the assurances of analysts that China will dominate this century, demographic data suggest the opposite. Neighboring India is now claiming the role of the most populous country, which is expected to surpass China in number in the next decade.

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