Growth in China lags behind the rest of Asia for the first time since 1990

China’s economic output will lag the rest of Asia for the first time since 1990, according to new World Bank forecasts, which highlight the damage wrought by Xi Jinping’s zero-Covid policy and the collapse of the world’s largest real estate market.

The World Bank has revised its forecast for gross domestic product growth in the world’s second largest economy to 2.8 percent, compared to 8.1 percent last year, and down from its forecast of 4 to 5 percent in April.

At the same time, expectations for the rest of East Asia and the Pacific have improved. The region excluding China is expected to grow 5.3 percent in 2022, up from 2.6 percent a year earlier, thanks to high commodity prices and a post-pandemic recovery in domestic consumption.

“China, which has been leading the recovery from the pandemic, has largely shrugged off the delta [Covid variant] difficulties is now paying the economic cost of containing the disease in its most contagious manifestation,” Aaditya Mattoo, the World Bank’s chief economist for East Asia and the Pacific, told the Financial Times.

China had set a GDP target of about 5.5 percent for this year, which would have been a three-decade low. However, the prospects have deteriorated significantly in the last six months.

Xi’s policy of relentlessly suppressing coronavirus outbreaks through lockdowns and mass testing has restricted mobility and hampered consumer activity, while China’s real estate sector — which accounts for about 30 percent of economic activity — suffers an historic collapse.

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The Washington-based group’s latest forecast follows a number of financial institutions, including Goldman Sachs and Nomura, also trimming their forecasts for next year. The rise in pessimism is based on assessments that Xi is likely to continue his zero-Covid policy beyond 2022.

Many economists and analysts had predicted that in response, Beijing would significantly step up stimulus measures, boost consumption and accelerate easing measures to stem the housing market downturn.

However, Mattoo said that while China has “immense ammunition to deliver strong stimulus,” Beijing appears to have concluded that fiscal stimulus would be “emasculated” by the zero-Covid restrictions.

The data comes amid broader concerns that policies under Xi – who will secure an unprecedented third term as Chinese Communist Party leader next month – are undoing the economic momentum that began under Deng Xiaoping’s reform era.

The World Bank has also feared the housing slowdown is a deep “structural” problem. To reduce the immediate risk of contagion from the “turbulence” in the real estate sector, the bank said Beijing must provide distressed developers with more liquidity support and financial guarantees for project completion. However, in the longer term, tax reforms were needed to provide local governments with new sources of revenue beyond the sale of land, including a property tax.

In contrast, the economies of East Asia and the Pacific, particularly the export-oriented economies of Southeast Asia, are expected to grow faster and experience lower inflation for the most part in 2022.

Government fuel subsidies in Indonesia, Thailand and Malaysia have helped keep inflation low by global standards. Domestic consumption has risen as the region abandoned lockdowns and stricter approaches to deal with the pandemic.

At the same time, higher commodity prices triggered by the global energy crisis have boosted the region’s export-dependent economies. Indonesia, a major coal exporter, announced last week that exports hit a record $27.9 billion in August.

Some central banks including Indonesia, Vietnam and the Philippines have started raising interest rates.

Still, the region is under less pressure than other parts of the world, Mattoo said. “I think the gradual tightening that we’re seeing . . . can be sustained for some time.”

However, some of the measures, such as food and fuel subsidies, could slow growth by the end of the year, the bank warned. According to the report, price controls distort the market and often help the wealthy and big companies while increasing government debt.

There are already signs of stress. Mongolia and Laos are heavily indebted – large parts of which are denominated in foreign currencies – and vulnerable to global inflation and subsequent exchange rate depreciation.

“I would say that at this point in time this is something to watch rather than cause serious concern,” Mattoo said.