Real estate, virus control vital to growth
China's GDP grew 2.5 percent year-on-year in the first half of 2022, albeit growth slowed to 0.4 percent in the second quarter. This means the economy needs to grow by at least 7.8 percent in the second half of the year for China to realize the 5.5 percent growth target it set for 2022 at the beginning of the year.
That appears a daunting task, because even if the economy achieves its potential growth rate of 6 percent in the second half, overall growth for 2022 would be less than 4.5 percent.
Of course, the growth rate is not the only important indicator of the health, resilience and potential of an economy. If China's economy recovers to its potential growth rate in the second half, it will also achieve its much-needed goal of stable growth. But the problem is that it is very difficult to realize 6 percent growth.
China's GDP growth slowed down from the second half of 2021 to the first half of this year because of sporadic infection outbreaks, especially of the Omicron variant of the novel coronavirus, and the slump in the real estate industry.
The sporadic outbreaks this year were different from that in 2020, because the virus then had not mutated into so many strains and despite being highly pathogenic, it was less transmissible. As a result, China's "dynamic clearing" approach was very effective in containing its spread. In fact, the approach made China the first major economy to largely contain the pandemic and achieve a strong economic recovery while the rest of the world was still battling the virus.
China's economy started to recover in May 2020, and maintained the momentum till the first half of last year. The Omicron variant, which started spreading in the country in the second half of last year, is highly contagious and hence extremely difficult to contain. And the anti-pandemic measures that have helped contain it to a large extent have also curbed consumer spending.
Also, the real estate sector's slump has slowed overall economic growth. The official data showed the real estate sector decreased 7 percent year-on-year to 18.6 trillion yuan in the second quarter.
And in 2021, more than 14.7 trillion yuan ($2.2 trillion) was invested in China's real estate market, and the commercial housing sales exceeded 18.1 trillion yuan, which clearly proved the sector's important role in fueling growth and huge contribution to the 114 trillion yuan GDP in 2021.
Since real estate has a long industry chain, which includes steel, cement, other construction materials, electrical appliances and furniture, its growth can drive the consumption and development of the entire industry chain－but its slump would accordingly affect the entire industry chain.
In the first half of this year, property sales fell more than 20 percent according to official data. And as the real estate sector's share in China's GDP is substantial, many other industries have to grow at a much faster rate to make up for its slump, which is a big challenge the Chinese economy has to overcome.
But what caused the dramatic decline of the real estate sector?
The measures to control the high debt of the housing sector are quite necessary to rein in financial risks. But the drastic decline in housing credit and capital liquidity has caused a precipitous drop in housing sales. And eventually, the liquidity problem will reduce people's urge (if not necessity) to buy houses, especially presale apartments, for fear of housing construction remaining incomplete in case developers' cash flow stops or reduces.
In macroeconomics, there is something called "financial accelerator" theory. In China, the real estate sector is like such a financial accelerator, because it produces assets that can be mortgaged to borrow money. Conversely, if real estate credit shrinks, so does social credit. And if an industry that serves as a financial accelerator suffers, the entire economy will be under pressure.
It is imperative for the authorities to take measures to stabilize the real estate sector. Easing developers' credit constraints will not only revive the supply of houses, but also buttress the confidence of home buyers.
In addition, the authorities need to take measures to strike a better balance between the strict, effective anti-pandemic measures and economic activities to facilitate faster economic recovery in the second half of this year.
To begin with, the central authorities should unify the anti-pandemic measures nationwide, which will ease the unnecessarily rigid measures of some local governments. A unified and more effective set of measures, including regular nucleic acid testing, should help people gradually start traveling like they used to do before the pandemic, which in turn will help boost the economy.
No one can possibly predict when the pandemic will end. But based on some necessary prevention and detection measures, the improving anti-pandemic measures could slowly make normal international travel possible.
In short, a reasonable economic growth target is still within China's reach if it takes effective measures to stabilize the real estate sector and boost consumption while continuing with the effective anti-pandemic measures in the second half of this year.
The author is dean of the National School of Development, Peking University.
The views don't necessarily reflect those of China Daily.
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