China’s economy declined late last year due to real estate problems

BEIJING – Construction and real estate sales have fallen. Small businesses have closed due to rising costs and weak sales. Debt-laden local authorities are cutting the salaries of civil servants.

China’s economy slowed markedly in the last months of last year as the government’s measures to curb real estate speculation also hurt other sectors. Shut-offs and travel restrictions to contain the coronavirus also reduced consumption. Strict rules for everything from internet companies to after-school education companies have set in motion a wave of layoffs.

China’s National Bureau of Statistics said on Monday that economic output from October to December was only 4 percent higher than in the same period last year. This represented a further decline from growth of 4.9 per cent in the third quarter, July to September.

World demand for consumer electronics, furniture and other home comforts during the pandemic has kept exports strong, preventing China’s growth from halting. Throughout last year, China’s economic output was 8.1 percent higher than in 2020, the government said. But much of the growth was in the first half of last year.

The snapshot of China’s economy, the most important locomotive for global growth in recent years, adds to expectations that the broader world economic outlook is beginning to weaken. To make matters worse, the Omicron variant of the coronavirus is now spreading in China, leading to more restrictions around the country and increasing fears of renewed supply chain disruptions.

The declining economy poses a dilemma for China’s leaders. The measures they have imposed to meet income inequality and restrain companies are part of a long-term plan to protect the economy and national security. But officials are on guard against causing short-term economic instability, especially in a year of unusual political significance.

Next month, China will host the Winter Olympics in Beijing, which will put an international spotlight on the country’s achievements. In the autumn, Xi Jinping, China’s leader, is expected to demand a third five-year term at a Communist Party congress.

With declining growth in his country, declining demand and debt still at near-record levels, Mr. Xi may face some of the biggest economic challenges since Deng Xiaoping began lifting the country out of his Maoist straitjacket four decades ago.

“I am afraid that the operation and development of China’s economy in the next few years may be relatively difficult,” Li Daokui, a prominent economist and Chinese government adviser, said in a speech late last month. “When we look at the five years as a whole, it may be the most difficult period since our reform and opening 40 years ago.”

China is also facing the problem of rapid aging, which could create an even greater burden on China’s economy and workforce. The National Bureau of Statistics also said that China’s birth rates fell sharply last year and are now barely higher than the death rate.

Fights in the private sector

As the cost of many raw materials has increased and the pandemic has caused some consumers to stay at home, millions of private businesses have crumbled, most of them small and family-owned.

This is a major concern because private companies are the backbone of the Chinese economy, accounting for three-fifths of production and four-fifths of urban employment.

Kang Shiqing invested much of its savings almost three years ago in opening a women’s clothing store in Nanping, a river town in Fujian province in southeastern China. But when the pandemic hit a year later, the number of customers dropped drastically and never recovered.

As in many countries, there has been a major shift in China towards online shopping, which can undermine stores by using less labor and operating from affordable department stores. Mr. Kang was stuck and paid high rents for his shop despite the pandemic. He finally closed it in June.

“We can hardly survive,” he said.

Another persistent difficulty for small businesses in China is the high cost of borrowing, often at double-digit interest rates from private lenders.

Chinese leaders are aware of the challenges facing private companies. The central bank is taking action to encourage the country’s state-controlled commercial banks to lend more money to small businesses. Premier Li Keqiang has promised further cuts in taxes and fees to help the country’s many struggling small businesses.

On Monday, China’s central bank took a small step to reduce interest rates, which may help reduce interest rates on the country’s heavily indebted property developers slightly. The central bank pushed down by one tenth of a percentage point its interest rate reference for some one-year loans, to 2.85 per cent.

Construction sheds

Construction and furnishing of new homes have represented a quarter of China’s economy. Heavy lending and widespread speculation have helped China build the equivalent of 140 square meters of new housing for every city dweller over the past two decades.

This autumn, the sector faltered. The government wants to curb speculation and deflate a bubble that had made new housing unaffordable for young families.

China Evergrande Group is just the largest and most visible of an extended list of real estate developers in China who have run into major financial difficulties in the past. Kaisa Group, China Aoyuan Property Group and Fantasia are among other developers who have struggled to pay as bond investors become more cautious about lending money to China’s real estate sector.

As real estate companies try to save money, they start fewer construction projects. And it has been a big problem for the economy. For example, the price of rebar for concrete in apartment towers fell by a quarter in October and November before stabilizing at a much lower level in December.

The fall in house prices in smaller cities has damaged the value of people’s assets, which in turn has made them less willing to spend. Even in Shanghai and Beijing, apartment prices are no longer rising.

There have been weak indications of renewed government support to the real estate sector in recent weeks, but no signs of a return to lavish lending from state-controlled banks.

“Evergrande’s economic hardship” is a signal that money will be squeezed from real estate to the stock market, “said Hu Jinghui, an economist who is a former chairman of the China Alliance of Real Estate Agencies, a national trading group. “The guidelines can be loosened, but there can be no return to the past.”

Local authorities feel the pinch

The downturn in the housing market has also hurt local authorities, which rely on land sales as a key source of income.

The International Monetary Fund estimates that government land sales each year have raised money equivalent to 7 percent of the country’s annual economic output. But in recent months, developers have limited land purchases.

Starved of income, some local authorities have stopped hiring and cut bonuses and benefits for civil servants, which has led to widespread complaints on social media.

In Hangzhou, the capital of Zhejiang province, an official’s complaint of a 25 percent cut in her salary spread quickly online. The municipal council has not responded to a fax asking for comment. In the northern province of Heilongjiang, the city of Hegang announced that it would not employ more low-level workers. City officials deleted the announcement from the government’s website after it drew public attention.

Some governments have also raised taxes on businesses to try to make up for the shortfall.

Bazhou, a city in Hebei Province, collected 11 times as much in fines on small businesses from October to December as in the first nine months of last year. Beijing criticized the city for undermining a national effort to reduce the cost of doing business.

Pockets of strength in export

Exports set records. Families around the world have responded to being stuck at home during the pandemic by spending less on services and more on consumer goods that are now mainly made in Chinese factories.

Some areas of consumption spending have been quite robust, especially the luxury sector, with sports cars and jewelry selling well.

Few expect the government to allow a severe economic downturn this year, ahead of the Communist Party’s congress. Economists expect the government to soften its lending restrictions and step up public spending.

“The first half of the year will be challenging,” said Zhu Ning, vice dean of the Shanghai Advanced Institute of Finance. “But then the second half will see a return.”

Li du contributed research.