[Global Focus] 1 Year Since China's Reopening... Economy Picking Up, but Risks 'Simmering'

Q3 Growth Rate at 4.9%, Stable Trajectory
Major Institutions Raise Full-Year GDP Growth Forecasts Again
Threats Persist Including Real Estate Slump and Worsening US-China Relations
Mid- to Long-Term Growth Turning Point Expected Next Year

It has been one year since China abruptly announced its transition to With-Corona in November last year. The rapid recovery of China at the time of reopening and the expected global economic trickle-down effects did not materialize. At the same time, the 'China crisis theory' that spread mainly in the West was far from the truth. China showed signs of strengthening the fundamental strength of its economy through a gradual recovery. It also attempted structural adjustments in sectors such as the real estate market and the automobile industry.

Experts predict that next year will mark a turning point where China’s medium- to long-term growth momentum can be confirmed. With the unprecedented uncertainty caused by the spread of COVID-19 removed, future outcomes will purely reflect the capabilities of the top leadership and administrative authorities. However, the situation remains challenging due to ongoing external risks such as U.S. pressure on China, supply chain restructuring and sanctions, and the Israel-Palestine war.

Economy Raises Its Head... Market Praises ‘Holding Up Well’
Major Institutions That Lowered Forecasts Now Upwardly Revise

External evaluations of China’s economic growth forecasts have fluctuated wildly over the past year. When the National People’s Congress (NPC) announced this year’s GDP growth target as ‘around 5.0%’ in March, the market viewed it as a somewhat conservative approach considering the feasibility of achieving it. However, when the second-quarter growth rate came in at 6.3% year-on-year despite the base effect, falling well short of the market forecast of 7.3%, public opinion grew concerned about long-term low growth by comparing China’s situation to Japan’s ‘Lost 30 Years.’ U.S. President Joe Biden described the Chinese economy as a ‘time bomb,’ and major media outlets such as The New York Times and CNN predicted that China would face significant difficulties in the coming years.

However, on the 18th, China’s National Bureau of Statistics announced a third-quarter growth rate of 4.9%, exceeding the market expectation of 4.4%. The cumulative growth rate for the first three quarters of this year reached 5.2%, meaning that if China grows by about 4.4% in the remaining fourth quarter compared to last year, it will achieve this year’s target.

Looking at the third-quarter growth rate by quarter, strong recoveries were detected in major cities. Hainan Province in the south, which China is developing as the ‘world’s largest free trade port,’ recorded a growth rate of 9.5%, and the northern Inner Mongolia Autonomous Region posted 7.2%. Liaoning Province, which suffered economically during the COVID-19 spread, grew by 5.3%, surpassing the national average for the first time in 10 years. Additionally, industrial production (4.5%) and retail sales (5.5%) announced on the same day both exceeded market expectations. The unemployment rate for the same month was 5.0%, the lowest since October 2021 (4.9%). The People’s Bank of China’s decision on the 20th to keep the Loan Prime Rate (LPR), which effectively serves as the benchmark interest rate, unchanged can also be seen as a judgment that the economy has settled on a certain trajectory.

The market has begun to listen to optimistic forecasts about China. Nicholas Lardy, a researcher at the Peterson Institute for International Economics, said, “In July, regulatory authorities sent a clear signal that at least regulations on internet companies had ended,” adding, “Private investment is still estimated to account for more than half of total internet industry investment, reflecting the Chinese leadership’s recognition that entrepreneurship must be encouraged.” Arvind Subramanian, former chief economic advisor to the Indian government who argued in his 2011 book that China’s economy would surpass the U.S. by 2030, stated, “Despite current problems, what China has achieved is the greatest economic miracle humanity has ever seen,” and “China will continue to grow faster than the U.S. over the next decade, so I maintain my previous forecast.”

Major institutions have also rushed to revise upward their GDP growth forecasts for this year. Citigroup raised its forecast from 5.0% to 5.3%, JPMorgan from 5.0% to 5.2%, and Morgan Stanley increased its range from 4.8?4.9% to 5.1%. UBS and Nomura Securities also proposed 5.2% and 5.1%, respectively, raising their previous forecasts by 0.4 and 0.3 percentage points. However, Goldman Sachs lowered its forecast slightly from 5.4% to 5.3%, a 0.1 percentage point decrease.

Real Estate Risks Ongoing... Corporate Crisis Sentiment Rising
U.S.-China Relations Complicated Further by Israel-Palestine War

These achievements can be seen as the result of the Chinese government’s focus on strengthening monetary, fiscal, and real estate stimulus measures, which improved consumer sentiment and the business environment. However, in the real estate market, considered a major economic risk for China, there are no signs of improvement despite government efforts.

In particular, industry-originated risks are becoming more prominent. On the 18th, Country Garden (Biguoyuan), a developer, failed to pay interest on its dollar-denominated bonds after the grace period expired, effectively entering default. Country Garden holds $186 billion in debt, the largest among private real estate developers. Evergrande Group announced it would revise some restructuring terms proposed by creditors but did not disclose specifics. A bankruptcy-related hearing scheduled for the end of this month was also postponed. Furthermore, the balloon effect caused by real estate stimulus measures in first-tier cities is worsening the economic conditions in smaller cities, increasing market risks.

Local analysts and industry insiders expect the authorities to propose ‘urban redevelopment projects’ within the year to stimulate the market and restore demand. China also achieved meaningful results through regional redevelopment projects during the 2015 real estate downturn. The timing is widely expected to be around autumn, generally considered the peak season for real estate.

Compared to the 2008 U.S. subprime mortgage crisis, the current situation is considered to be under government control. While it could be risky if borrowers fail to repay mortgage loans, in China, a deposit of 20?30% is required at the time of lending, reducing risk relatively. Lardy explained that Industrial and Commercial Bank of China, the country’s largest bank, reported a non-performing loan ratio of 1.38% at the end of last year, but mortgage loan defaults were only 0.39%.

While the real estate market is a domestic risk factor, the biggest external risk is the unstable relationship with the U.S. On the 20th, China added graphite, a key material for secondary batteries, to its export control list following gallium and germanium. This came after the U.S. announced expanded export control measures on advanced AI semiconductors to China on the 17th (local time). As the U.S. pressured China’s semiconductor manufacturing facilities under the pretext of military security, China retaliated by controlling essential materials heavily relied upon by major countries, including the U.S.

The war between Israel and the Palestinian armed group Hamas has also complicated China’s diplomatic and political stance. China has expanded its influence in the Middle East to counterbalance the U.S. However, with the U.S. becoming more actively supportive of Israel in this war, China, which effectively supports the establishment of an independent Palestinian state, is now under pressure.

With the real estate market slump and worsening U.S.-China relations unlikely to disappear soon, the market is focusing on next year’s situation. Harry Murphy Cruz, an economist at Moody’s Analytics, said, “China’s economic recovery is still in its early stages,” adding, “With no signs of improvement in the real estate market downturn, dark clouds remain overhead.” Oxford Economics noted that due to the gap between positive macro data and fragile real estate sentiment, without additional stimulus in the fourth quarter, the pace of economic recovery will be difficult to accelerate.

Jiang Ziwei, chief economist at Pinpoint Asset Management, told the Hong Kong South China Morning Post (SCMP), “The government’s focus will now shift to growth prospects for next year,” explaining, “The key will be what targets the government sets and how much fiscal easing is implemented.”

This content was produced with the assistance of AI translation services.