Tuesday, October 3, 2023

World Bank Cuts China's Growth Forecast as Property Crisis Deepens

World Bank Cuts China's Growth Forecast as Property Crisis Deepens


The World Bank has cut China's growth forecast as the world's second-largest economy faces multiple issues, ranging from ongoing property crisis to weakening domestic demand and deflation, which is dragging down the economy.

The report, released on Oct. 1, lowered China's gross domestic product growth forecast for 2024 to 4.4 percent, down from 4.8 percent in its April forecast.
The World Bank expects China's GDP growth in 2023 to stand at 5.1 percent, slightly aligning with other surveys of 5 percent for the year.

It also cut the 2024 growth forecast for developing economies in East Asia and the Pacific, including China, to 4.5 percent, compared with 4.8 percent in April.

The report highlights China's economic problems that weigh on its growth, such as growing debt, weakening property market, as well as longer-term structural factors.

It pointed out that as China heavily relied on the property sector for growth in the past, now it is turning back to bite its economy as the real estate market has been in deep trouble since 2021.

"China's past growth, largely driven by investment in infrastructure and property, has left firms and local governments burdened by debt—as saturated infrastructure yields diminishing returns and an oversupply of housing reduces property prices," the report reads.

In addition, the World Bank pointed out that while many countries experience high inflation, China faces deflation as the country's producer price index dropped by 0.4 percent per month during the January–July period, wearing away corporate profits.

China's slow growth also hurts the rest of the region, as a 1 percent decrease in its growth is associated with a 0.3 percent regional growth reduction.

The region's exports slowed down due to weakening global growth as China and Vietnam suffered over 10 percent drop in goods exports compared to last year.

Exports of the region, especially from China and Southeast Asia countries, also took a hit with the introduction of the Biden administration's Inflation Reduction Act and the CHIPS and Science Act last year, which aimed to enhance American manufacturing and reduce U.S. dependence on China.

The report noted that in the long run, China's exports will face "headwinds from geo-economic tensions and the fragmentation of global value chains."

Other Banks Also Cut Growth Forecast

The World Bank's lowered forecast of China's growth comes as multiple global financial institutions and rating agencies cut the country's growth projection below Beijing's official growth target this year.
The Chinese Communist Party (CCP) has officially set around a 5 percent growth target for 2023 following a disappointing 3 percent growth last year due to Beijing's strict COVID-19 lockdown measures.

Some institutions have downgraded their forecasts due to a dim outlook about the country's economy. In August, UBS cut its forecast to 4.8 percent for 2023 and 4.2 percent for 2024.

Last month, Fitch Ratings lowered China's growth to 4.6 percent for 2024, while Moody's kept its growth forecast for 2023 at 5 percent but cut its 2024 projection to 4.0 percent, down from 4.5 percent.

China's Property Crisis Could Take Years to Resolve

The ongoing property crisis is a major problem for China's economy. The World Bank said investment in China's real estate sector has stagnated and declined by 28 percent since July 2021 amid weak housing demand and property developers' debt distress.
Analysts believe the property sector is the main factor to blame for the economy's slow growth. Real estate giants like Country Garden and Evergrande have been deep in a liquidity crisis when authorities cracked down on excessive borrowing in 2021.
Evergrande is the world's most indebted property developer with a $340 billion debt. It has been in the spotlight of China's property crisis since late 2021 with a string of debt defaults.

Country Garden, the country's largest developer by contracted sales, is also teetering on default.

Multiple debt defaults in China's real estate industry have resulted in partially-finished apartment complexes with disgruntled homebuyers, severely hurting the buyer's confidence in the real estate market.

Analysts estimate that China's property sector accounts for a quarter or third of its economy, while the U.S. property market, at its peak, represents only 5 percent.

​​China economist Hao Hong told CNBC last week that the crisis could take many years, even a decade, to resolve as the country has built many houses and its rapid urbanization has slowed.
Last month, He Keng, former deputy head of China's statistics bureau, acknowledged that even China's population of 1.4 billion could not fill vacant apartments across the country.

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