China’s economy looks different than it did during the pandemic | Daily News Byte

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In the central Chinese city of Taiyuan, GDP grew by 10.9% year-on-year in the first three quarters of 2022. Pictured is a screen showing details of a new factory in the city.

Vcg | Visual China Group | Getty Images

BEIJING — China’s economy in 2023 will almost certainly not look like China’s economy in 2019.

Real estate fell under the blows of Beijing. Exports declined after the surge. Chinese e-commerce giant JD.com this year it replaced Huawei, hit by US restrictions, as China’s largest non-state-owned enterprise by revenue.

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In the past month, Beijing has abruptly ended many of the lockdown measures and Covid testing requirements that have weighed on economic growth over the past 18 months. Analysts have warned of a difficult road to a full reopening, but now expect China’s economy to recover sooner than previously predicted.

The elements supporting that growth will almost certainly look different than they did three years ago, economists say.

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

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

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In the next five years, cumulative investment in the digital economy is expected to grow more than sevenfold to reach 77.9 trillion yuan ($11.13 trillion), according to CICC estimates.

That exceeds expected cumulative investment in 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 investment category, according to the report. But CICC analysts say that this year, investments in real estate fell by around 22% compared to last year, while investments in the digital and green sectors increased by around 24% and 14%, respectively.

In 2020, Beijing dealt with developers’ heavy reliance on debt, which contributed to non-payment of obligations and reduced sales and investment in residential buildings. Authorities eased many of those financial restrictions this year.

Fading export

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

Now demand is falling. China’s exports began to decline on an annual basis in October — for the first time since May 2020, according to Wind Information.

Next year, a contraction in net exports is expected to reduce growth by 0.5 percentage points, Goldman Sachs chief China economist Hui Shan and his team said in a Dec. 16 note. Net exports have supported China’s GDP growth in recent years, contributing as much as 1.7 percentage points in 2021, analysts said.

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However, China’s exports to the Association of Southeast Asian Nations rose, surpassing exports to the US and the EU on a monthly basis in November, according to customs data.

“Exports to ASEAN countries can serve as a slight buffer to pressures in the EU and US markets,” Chinese economist Xiaowen Jin and his team said in a note on Wednesday. They expect ASEAN GDP growth to return in 2023, while the US and EU will spend part of next year in recession.

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

Beijing has made strong efforts to increase the development of the nation’s electric car industry. Many brands from No to BID began selling passenger cars to Europe and other countries.

Consumer return?

“The rapid slowdown in exports also means that China needs to tap domestic markets for growth in the foreseeable future,” Hao Zhou, chief economist at Guotai Yunan Securities, said in a Dec. 15 note. “With the easing of Covid restrictions, consumption is likely to see a significant and sustained recovery from next year.

He expects retail sales to grow by 6.8 percent and national GDP by 4.8 percent next year.

Central government policy announcements this month prioritize boosting domestic consumption. Retail sales have lagged behind overall growth since the pandemic, while a record proportion of people preferred to save.

Goldman Sachs analysts raised their 2023 GDP forecast from 4.5% to 5.2% on an earlier-than-expected reopening of the economy, with spending as the main driver.

But they warned that incomes and consumer confidence would take time to heal, meaning any release of “pent-up demand” next year could be limited outside a few categories such as international travel.

The rich spend more, the poor spend less

Spending among poorer Chinese is not keeping pace with that of wealthy Chinese – contrary to the greater uniformity among the groups before the pandemic, McKinsey research this year found.

That trend was also shown in the financial results of the companies.

In the quarter ended September 30, focused on the budget Pinduoduo said revenue from merchandise sales fell 31% from a year ago to 56.4 million yuan.

AlibabaChina’s trade revenue, which includes apparel sales, fell 1% year-on-year to 135.43 billion yuan during that time.

Sales of more expensive items favored by the middle class, including electronics and home appliances, rose at JD.com, which said revenue from such products rose about 6% to 197.03 billion yuan in the three months ended Sept. 30.

In the long term, McKinsey expects millions of urban households to become wealthier, while the number in the lower income category shrinks.

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