China businesses lose advantage against global peers amid zero-Covid policy

WITHOUT a decisive abandonment of the zero-Covid policy, China faces considerable risks of a growth slowdown in the second half of this year, making Beijing’s 5.5 per cent growth target a tall challenge, economists say.

Nomura, a leading Japanese investment bank, said the world’s second-largest economy could be stuck in a “Covid business cycle” (CBC), where policymakers are determined to achieve zero Covid, while avoiding disastrous economic consequences.

“Beijing has both the capability to carry out a zero-Covid strategy and the capacity to boost demand when its economy stumbles, but China’s CBC may occasionally have external implications due to the sheer size of China’s economy. The CBC has material implications for both economic fundamentals and financial assets,” warn Nomura’s economists, led by chief China economist, Ting Lu. Their China growth forecast is at 3.3 per cent. 

Alicia Garcia-Herrero, chief economist for Asia-Pacific at Natixis, is projecting a 3.5 per cent growth this year. 

“This is not about new lockdowns because we are assuming in our scenario that there won’t be new lockdowns; that would be a risk scenario for us. It is more about the fact that we are not really seeing clear signals of effective fiscal and monetary stimulus. Both seem to fall short of what is needed for China to grow 5.5 per cent,” Garcia-Herrero said at a webinar, ahead of the unveiling of the French bank’s flagship China Corporate Monitor report.

On what to expect from Beijing’s “forceful measures” to stimulate the economy, she ventured that it may turn to the banking sector like in 2019, when China experienced a cyclical slowdown.

“I don’t think anyone can provide that quick fix except the banks. They need to come in and lend to the private sector, the small and medium enterprises and even households facing difficulties with debt repayment,” she said. This, however, could further strain the financial health of smaller banks which are reeling from the zero-Covid policy.

China is estimated to need around 18 per cent growth in infrastructure investment, (compared to the current 5-6 per cent), to achieve the overall 5.5 per cent growth target.     

Despite the government’s efforts to promote faster credit growth, consumer and investor sentiment remains weak, haunted by fears of more bond defaults, credit risks and the regulatory crackdown on real estate developers.

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Garcia-Herrero said China’s real estate sector is “not out of the woods”, as there are still unresolved issues facing the restructuring plans of many embattled developers including China Evergrande Group. 

While the financial health of Chinese firms improved in 2021, the magnitude was smaller than global firms which benefited from reopening, monetary easing and high commodity prices. From 2022, Chinese firms have seen tougher financial health challenges due to the Covid-related lockdowns.

Economists from the French bank noted that credit polarisation between state-owned (SOEs) and private enterprises (POEs) has become more apparent. While SOEs were supported by prices and government policies, POEs suffered from tighter regulations and profit margin squeeze, especially in the real estate and Internet platform sectors.

Chinese firms were more resilient in the new economy such as semiconductors, electric vehicles and renewables. 

Going forward, laxer fiscal and monetary policies in China should help with corporates’ financial health, but more headwinds can come from higher leverage, regulatory uncertainties, geopolitical tensions and global inflationary pressure.