A new Omicron variant is affecting China’s economy, while a severe downturn in the property sector has cut the World Bank’s forecast for China’s economic growth this year and next.
Compared with last year, the bank expects China’s GDP to grow by 8% in 2021 – that’s down from its prior estimates. (In October, the World Bank projected that China’s GDP would grow 8.1% this year. In June, it forecasted 8.5%). It also lowered its forecast for 2022 to 5.1% from 5.4%, which would be the country’s second slowest growth pace since 1990, when the economy rose 3.9% after international sanctions related to the 1989 Tiananmen Square massacre.
In 2020, China’s economy expanded 2.2%. In its latest report on China’s economy, on Wednesday, the World Bank said that downside risks have increased. Further it said that outbreaks of domestic Covid, including the Omicron variant, could lead to more widespread and longer-lasting restrictions and further disrupt economic activity. Moreover, a “severe and prolonged downturn” in the highly leveraged property sector could have significant effects across the economy, the report said.
While China was the only major economy to grow in 2020, many threats have marred its expansion this year, including pandemic-related restrictions, an energy crisis, and unprecedented government targeting of private enterprises. While it tries to recover from the pandemic, sweeping regulatory crackdowns on tech, education, and entertainment have crushed stocks. A wave of layoffs has also followed from the crackdowns, putting further pressure on the job market. The new regulations on property firms, which took effect last year, have come at a price to major developers who are already carrying too much debt.
Real estate, which accounts for more than a third of the national economy, is in deep trouble, with many players on the verge of collapse. Beijing has decided to rethink its policy approach after increasing economic headaches. At a key economic summit earlier this month, President Xi Jinping and other top leaders named “stability” as their top priority for 2022.
The world bank said China needs to rebalance its economy across multiple dimensions in order to achieve quality growth over the medium term. It includes efforts to make China a consumption-driven economy, making the private sector and markets play a bigger role than the state, and shifting from a high-to-low-carbon economy.
The bank recommended China conduct fiscal reforms to improve its tax system, expand social safety nets, and promote innovation in green financing instruments in support of the rebalancing process.