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A Hangzhou location of the Element Fresh chain, entered bankruptcy liquidation in December 2021, caused by the coronavirus pandemic.

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BEIJING – Sluggish consumer spending has dragged down China’s economy since the pandemic, and looks unlikely for 2022.

Along with the real estate market, consumption is one of the two areas that economists are most concerned about in their China growth outlook. Consumer spending is also the field Businesses and investors have bet on when they expect China’s middle class spending capacity to grow in the coming years.

Top leaders in Beijing warned at an economic planning meeting this month that growth faces “triple pressure” from shrinking demand, supply shock and weakening expectations.

Wang Jun, chief economist at Zhongyuan Bank, said in Mandarin, translated by CNBC. “If demand improves, then expectations will improve.”

The main reason for the unsustainable economic development, he said, is the weakening of demand, especially noting the negative impact of the pandemic on people’s incomes. He also pointed to the need from a reduction in local government spending on infrastructure projects and Regulations on the business of tutoring after school have affected employment.

Regarding the third pressure of supply shocks, he said they were mainly related to the pandemic and overly drastic carbon-reduction measures, which were later adjusted. Virus-related restrictions on returning to work have contributed to disruptions in global supply chains, including shortages in key components such as semiconductors.

Overall, job and income uncertainty reduces people’s willingness to spend. Beijing’s crackdown on property developers’ debt dependence has also affected households’ perceptions of wealth, as most are tied up by assets.

Jianguang Shen, chief economist at Chinese e-commerce firm JD.com, said in Mandarin, translated by CNBC: “How consumption recovers next year will have a huge impact on economy.

Shen said authorities can boost consumption by follow the example of Hong Kong in providing vouchers. That would force consumer spending into specific businesses like hotels, further incentivized by a decentralized structure that won’t unlock further coupons until the first has expired or been redeemed. used up.

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Hong Kong’s retail sales fell in 2019 and 2020 as protests disrupted the local economy, even before that. The pandemic has closed the semi-autonomous region to foreign and mainland tourists. The local government rolled out its latest voucher program in August, and retail sales from October to October are up 8.45% year-over-year.

Chinese mainland retail sales fell last year even though the economy is growing overall. Compare that to a drop that helped retail sales jump in the first quarter, but the pace of growth has slowed, especially since the summer. Retail sales in the first 11 months of the year still increased by 13.7% over the same period in 2020.

According to estimates by Goldman Sachs analysts, consumers have increased spending on food and clothing rather than on services such as education and entertainment. They expect that the divide between goods and services will soften slightly next year.

But even with their projection of 7% growth in real household consumption next year, it “will remain below pre-Covid trends by the end of 2022”, the analysts said. They point to the scissors from China’s “zero tolerance” policy to control Covid and the downturn in the real estate sector.

The investment bank expects China’s GDP to slow to 4.8% next year, down from the 7.8% expected this year.

Real estate needs home buyers

Trouble in China’s vast real estate market attract the attention of global investors this summer when developers are in debt like Evergrande skew towards the edge of the default, causing fear of contagion. Government efforts to curb the industry’s high debt levels and soaring house prices have resulted in tighter financial conditions for developers – and reduce sales and prices.

Macquarie Chief Economist Larry Hu said in his outlook report. He expects housing starts and floor space for sale to decline at an even faster rate next year, and real estate investment to fall 2%, after an expected 4.8% increase in this year.

“Asset policy should shift from tightening to easing next year, as we expect policymakers to preserve 5 per cent GDP growth,” Hu said. “The risk is that they may react too late, given their reluctance to use the asset as a vehicle of stimulus.”

China’s top-level economic planning meeting this month showed little change in property policy. Beijing still holds the view that “home is for living, not for speculation”.

Wang of Zhongyuan Bank said it will take several years to solve the real estate industry’s problems. Meanwhile, he expects the central government to need to issue more debt and spend more to help local governments weather the impact of their revenues.

According to Moody’s, local and regional governments make at least 20%, if not more, from selling land to developers.

One challenge for policymakers is to reduce the level of real estate-related debt while ensuring the property market does not slow down dramatically.

“Weak market sentiment is also affecting home sales, as buyers delay purchases in anticipation of further price falls.” Fitch said in a report last week. The company expects a 15% drop in home sales by value next year, which could squeeze 5 out of 40 developers in its rating range.

“We expect the drop in property construction activity to affect related sectors, such as steel, iron ore and coke, slowing the pace of overall fixed asset investment,” Fitch said. and even put a strain on financial institutions”.

As for next year’s economic policy, Beijing has emphasized that stability is its priority. The authorities also made it clear this year that Growth quality is more and more important than quantity.

Columbia University’s Earth Institute, China Center for International Economic Exchange and Ali Research Institute have attempted to measure such progress by the national sustainable development index. In addition to GDP, the index combines factors such as revenue of high-tech businesses, and spending on education, social welfare, and pollution remediation.

The index rose to 82.1 in 2019, from 59 in 2015, according to the latest release this month.

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