How will China’s economy look like in future amid slashed growth rate?

As the World Bank slashed China’s projected growth rate, a report says multiple factors will affect its economy and change its outlook.

Real estate slump, decline in exports and impacts of US restrictions are main reason behind this trend, says CNBC in a report, which discussed how China’s economy would be different from the one we have before the pandemic.

Earlier this week, the World Bank had cut China’s expected growth for 2022 to 2.7 percent, down from 4.3 percent in June and from 8.1 percent to 4.3 percent for 2023.

“Economic activity in China continues to track the ups and downs of the pandemic – outbreaks and growth slowdowns have been followed by uneven recoveries,” the World Bank said in a statement.

“Real GDP growth is projected to reach 2.7 percent this year, before recovering to 4.3 percent in 2023, amid a reopening of the economy.”

However, it is not just Covid as the World Bank said China’s economy faced significant non-pandemic-related risks, too, including the uncertain global outlook, climate change, and persistent stress in the real estate market amid a crackdown by Beijing on excessive lending.

And now the CNBC says the elements underpinning growth will almost certainly look different than they did three years ago.

China’s growth model is moving from one highly dependent on real estate and infrastructure to one in which the so-called digital and green economy play greater roles, analysts at leading Chinese investment bank CICC said in their 2023 outlook released last month. They cited the ruling Chinese Communist Party’s 20th National Congress emphasis on innovation.

The digital economy category includes communication equipment, information transmission and software. Green economy refers to industries that need to invest in order to reduce their carbon emissions — electric power, steel and chemicals, among others.

Over the next five years, cumulative investment into the digital economy is expected to grow more than sevenfold to reach $11.13 trillion, according to CICC estimates.

That surpasses anticipated cumulative investment into real estate, traditional infrastructure or the green economy — making digital the largest of the four categories, the report said.

In 2021 and 2022, real estate was the largest category by investment, the report said. But the CICC analysts said that this year, investment into real estate fell by about 22% from last year, while that into the digital and green sectors grew by about 24% and 14%, respectively.

Beijing cracked down on developers’ high reliance on debt in 2020, contributing to defaults and a plunge in housing sales and investment. Authorities this year have eased many of those financing restrictions.

Drop in exports

While much of the world struggled to contain Covid-19 in 2020 and 2021, China’s swift control of the virus helped local factories meet surging global demand for health products and electronics.

Now, demand is dropping. China’s exports started to fall year-on-year in October — for the first time since May 2020.

A reduction in net exports is expected to cut growth by 0.5 percentage points next year, Goldman Sachs Chief China Economist Hui Shan and a team said in a Dec 16 note. Net exports had supported China’s GDP growth over the last several years, contributing as much as 1.7 percentage points in 2021, the analysts said.

But China’s exports to the Association of Southeast Asian Nations have picked up, surpassing those to the US and EU on a monthly basis in November, according to customs data.

“Exports to ASEAN countries may serve as a mild buffer to the pressures in EU and US markets,” Citi’s China economist Xiaowen Jin and a team said in a note Wednesday. They expect ASEAN’s GDP growth to rebound in 2023, while the U.S. and EU spend part of next year in recession.

Jin pointed out that China’s car exports, especially of electric cars and related parts, helped support overall exports this year.

Domestic consumers’ behaviour

The rapid deceleration in exports also means China needs to tap into domestic markets for growth over the foreseeable future.

However, spending among poorer Chinese isn’t keeping pace with how much wealthy Chinese are spending — a contrast to greater uniformity between the groups prior to the pandemic.

That trend has showed up in companies’ financial results. In the quarter ended Sept 30, budget-focused Pinduoduo said revenue from merchandise sales plunged by 31 percent from a year ago.

Alibaba’s China commerce revenue, which include apparel sales, declined by 1 percent year-on-year to during that time.

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