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Wednesday, September 22, 2021
Supply and Demand Issues in China's Economy
ANBOUND

In the recent turn of event, the default risk of real estate enterprises caused by Evergrande, is still brewing. Considering the trend of previous policy changes, such as the anti-monopoly in the internet sector and the rectification of the education and training sector, the trend of a gradual fall of the Chinese economy from its highs this year becomes more and more obvious. Data on industry, consumption, and investment all point to weak economic growth in the third quarter. Given the current situation, China's economic development may even face the possibility of another downward adjustment in the fourth quarter.

As things stand, many market institutions have adjusted their growth forecasts for the Chinese economy to reflect the volatility in the real estate market caused by Evergrande, as well as the continuing impact of COVID-19. These expectations imply that risk prevention measures, while defusing risk and improving supply, will also lead to a contraction in demand. This in turn, will put more pressure on China's economic growth. Bank of America has cut its forecast for China's real gross domestic product (GDP) growth this year to 8.0% from 8.3%, and its cut for 2022 is even steeper, from growth of 6.2% to growth of 5.3%. It also lowered its forecast for 2023 to 5.8% growth from 6.0% growth. It also added that these expectations are based on the premise of "spillover effects" from the real estate sector and financial markets caused by Evergrande will be minimal under effective government measures. Goldman Sachs warned that unless China sets its growth target well below 5%-6%, further deterioration in the real estate market will pose a challenge to economic policy in 2022. While overseas institutions have a tendency to be overly worried about China's real estate market, considering the size of the real estate market, it does account for a significant proportion of China's economy. As a result, fluctuations in the real estate market will naturally affect the stability of the overall economy.

As for the economic performance this year, it is believed that supply chain distortions and oversupply caused by the pandemic are still short-term and long-term problems facing China. In addition, the high prices of raw materials and energy are also impacting the supply chain; it is still necessary to promote supply-side structural reform to deal with it, as well as market clearing to alleviate the distortions on the supply side. Researchers at ANBOUND have warned that the current situation could be more complicated. In addition to structural problems on the supply side, there are also serious problems on the demand side. August's investment and consumption data continued the downward trend that has continued in recent months, while import and export growth rebounded. This means that China's economy continues to be affected by the pandemic. On the domestic front, a series of rectifications in the real estate, Internet technology, and financial sectors are also affecting overall demand, resulting in sluggish demand for consumption and investment. Under such circumstances, it is still of great and practical significance for the balance and growth of the economy to moderately increase effective demand and boost the economic growth towards potential growth rates through macro policy adjustment.

Under the policy stance of putting equal emphasis on stabilizing growth and preventing risks, some scholars are of the opinion that the introduction of macro-prudential policies is to some extent to curb economic overheating as well as excessive leverage and prevent the occurrence of financial crisis. But the problem now is that households and businesses are unwilling to spend, invest, and leverage up. In this regard, it is necessary for China to prevent increasing leverage and overheating in some sectors, but not tighten policy across the board just to prevent overheating risks. Judging from the current situation, the digital economy, green economy, new consumption, and new infrastructure investment are all affected by policies and face great uncertainties, making market players turn to risk prevention. If this situation continues, the recovery of overall demand will face another interruption, and even form a vicious circle (policy tightening -> shrinking demand -> heightened risk). Therefore, from this perspective, the balance between supply and demand needs to be taken into consideration when promoting economic growth. While continuing to promote supply-side structural reform and smooth internal circulation of the supply chain, recovery and improvement of demand need to be taken into consideration to expand the space for growth.

The current macro policy should not only consider the current situation, but also be forward-looking and sustainable. This requires not only cross-cyclical considerations, but also a counter-cyclical consideration of the reality of macro policies. At present, it is necessary to prevent not only overheating and economic bubbles, but also economic slowdown, rising debt, deflation, and economic downturn. The debt problem and weak demand require moderate easing to lower financing costs and boost economic vitality to drive demand growth. The same is true for the steady development of the real estate market. Bank of America also warned that any further delay in the policy response, or mishandling of a major debt default, could increase the risk of "mis-location" of growth.

According to ANBOUND's judgment, the moderate easing will not lead to runaway inflation in the absence of effective improvement in demand. Even as in other countries, a moderate level of inflation is good for growth and a healthy economic cycle. Moreover, given the current situation where overall demand has not fully recovered, the sharp rise in commodity prices is more like a result of supply chain distortions. An artificial contraction in such circumstances would only exacerbate the imbalance. The current fluctuations in coal prices are related to the impact of the relevant policies. Therefore, appropriate and timely measures should be taken to boost demand and promote the development of market entities to improve the employment level, so as to realize the income growth of enterprises and households, which will play a fundamental role in economic recovery and demand growth.

Final analysis conclusion:

Judging from the current situation, the problem facing China's economy is not only the distortion and mismatch of the supply side, but also the contradiction of insufficient demand. Therefore, in terms of macro policies, China still needs to balance the supply side and the demand side. In the future, forward-looking adjustments are needed to consolidate and promote the formation of endogenous economic growth.

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