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Although the Chinese economy remains on track to show strong growth for the whole of 2021, its recent deceleration is striking. To reverse the slowdown, policymakers will need to reform the way they debate, monitor and implement new regulations and measures to fight the pandemic.

NEW YORK – At the start of 2021, the consensus forecast for Chinese GDP growth this year among 25 major global banks and other professional forecasters was 8.3%. In contrast, the Chinese government itself growth target was about 6%, lower than the best estimates of 24 of 25 institutional forecasters. Did the government know something that foreigners had missed? Does he plan to do something he considers desirable even if it could jeopardize growth?

More recently, international banks downgraded their full-year growth projections for China as the economy’s expansion slowed. Growth in the third quarter was only 4.9% over one year, compared to 18.3% and 7.9% respectively during the first two quarters. The high year-over-year growth in the first quarter is largely due to the negative growth in the first quarter of 2020 due to lockdowns induced by the pandemic. Weak third quarter growth raises concerns about growth prospects in the fourth quarter and next year.

Part of the reduction in growth comes from the zero tolerance policy towards COVID-19, which calls for more frequent lockdowns than in most other countries. A wave of local COVID outbreaks in the summer has triggered blockages or travel restrictions in several Chinese cities. These not only reduced manufacturing output, but also severely affected many jobs in the service sector just as tourism began to flourish.

But the pandemic is not the only factor behind the slowdown. The government’s green industrial policy, stricter regulation of the real estate sector and blacklists of online platforms have also collectively held back growth.

Following his commitment to halt the increase in China’s carbon dioxide emissions by 2030 and reach net zero by 2060, the government has forced and often brutally reduced electricity production in coal-fired power stations, sometimes by 20%. The resulting power outages disrupted production at the affected factories.

In addition, the “three red lines», Initiated in August 2020 and intensified this year, sets ceilings on the debt ratio of real estate developers, the debt ratio and the debt ratio. Since many of these companies could not meet one or more of the red lines, and banks and capital markets are reluctant to provide new funding, they must sell assets, scale back operations, or both.

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Evergrande may be the biggest Chinese real estate developer to ever run into financial trouble, but it’s not the only one. Additionally, a downturn in real estate can easily spill over into industries such as steel, cement, furniture and appliances.

Finally, authorities’ decisions to blacklist online education companies, strengthen antitrust enforcement, and enact broad data protection law have helped halve share prices. many listed companies in the digital economy in the past 12 months. And falling stock valuations is just the tip of the iceberg, as many digital companies and their suppliers have had to downgrade their ambitions and plans. Hundreds of online education providers have folded and fired their employees.

Policy goals make sense, but how they are implemented exacerbates their economic costs. A zero COVID strategy was arguably reasonable at the pre-vaccine stage of the pandemic and has helped China achieve a positive economic growth rate Last year. But as new variants continue to emerge, all countries will eventually need to learn to live with the coronavirus. Fortunately, the cost of this operation becomes more manageable as the rates of vaccination and natural immunity increase.

If China is to use its strong implementation capacity, then pushing for universal vaccination against COVID-19 would seem well justified (because people who refuse the vaccine can end up harming others). On the other hand, periodic closures and border closures are very disruptive to the economy and people’s lives, and are not a sustainable strategy in the post-vaccination phase of the pandemic.

Regarding green industrial policy, power generation is the most carbon intensive sector in China, representing about 40% of the country’s emissions linked to energy consumption. Thus, reducing dependence on coal-fired electricity makes a valuable contribution to national and global emissions reduction efforts. But there are different ways of dealing with change.

China’s own experience with economic reform suggests that the use of price signals and market forces tend to minimize the costs of structural change. In particular, raising the price of Chinese carbon to a sufficiently high level and announcing a predictable price path with sufficient lead time could allow electricity producers and users to adapt and better adapt. , thus helping them achieve the same amount of emission reductions with much less losses GDP growth. Such an approach would also be less disruptive for Chinese households, including many residents in the northeast of the country who might worry about heating and electricity supply when a cold winter arrives.

Likewise, while moderating speculative house price increases is a desirable goal, curbing real estate development does not necessarily help achieve it. Given that about 30% of the Chinese economy increases or decreases with the real estate and construction sectors, an alternative path could cushion the adjustment difficulties. For example, promoting more affordable housing for low-income families and migrants from rural areas could create an offsetting demand for furniture, appliances, steel and cement.

Restricting after-school learning programs can free up time for children to engage in activities that nurture creativity and athletic ability, and ease the financial burden on families who previously felt pressured to purchase content. online education for their children. There is therefore a laudable social justification for the new regulations. Its relatively sudden implementation, however, not only reduces profits, stock prices and employment for e-learning companies, but also highlights the risk of abrupt policy changes in other sectors, affecting the market. broader investor sentiment.

China can restore investor confidence and regain its potential growth rate. To do so, the country will benefit from reforms affecting the way new regulations and measures to combat the pandemic are discussed, approved and implemented.

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