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LU Feng: Getting it in good repair


Policymakers are taking measures to address the challenges facing Chinese economy and boost its recovery

In 2023, there will be more favorable factors for China's economy. It is highly probable that there will be a substantial post-pandemic recovery relative to last year, and China's contribution to global economic growth is also expected to increase significantly. But there are several challenges that policymakers are seeking to address.

First, for the past three years, China adopted a containment strategy in fighting against the pandemic, known as the dynamic zero-COVID policy. This containment strategy attained its goal of containing outbreaks when the Delta variant of the novel coronavirus was the dominant strain in 2021, even though the pressure on economic performance had started to rise significantly. In 2022, with the prevalence of the more transmissible Omicron variant, a higher level of social mobilization of resources and social distance control were required to follow this containment strategy. Meanwhile, the frequent lockdown measures became a drag on the economy. Although the government rolled out several rounds of measures to stabilize growth, the momentum of the economic downturn was not reversed under the impact from the pandemic. In this context, with the Omicron variants proving to be less virulent, the nation's adjustment of its COVID policies at the end of the year — was a pragmatic and reasonable move, and it is one of the most important positive factors for economic recovery in 2023.

However, both international experience and the recent situation in China show that a shift in containment strategies inevitably leads to a spike in number of severe cases and even deaths. The spike in infections may weigh on domestic economic growth early this year, as the restart of spending will not be immediate. The pandemic, which has so far lasted three years, has affected consumers' psychological expectations and hit the balance sheets of small and micro-sized enterprises. Whether these can be repaired quickly will affect the speed of economic recovery.

Second, China's macroeconomic policy has undergone a saddle-shaped evolution with two positive ends and a tightening in the middle over the past three years. In early 2020, an extraordinarily proactive macro policy, led by the rollout of 1 trillion yuan ($147.4 billion) in special government bonds and over 5 trillion yuan in currency expansion, played an important role in spurring a strong economic recovery after the initial outbreaks were contained. The stimulus measures were gradually withdrawn starting from the second half of 2020 to the summer of 2021. This policy exit, coupled with the impact of stronger regulatory measures launched by several departments, resulted in the formation of a tightened policy environment. Starting from the autumn of 2021, especially with the heightened downward pressure on the economy starting from the end of the year, the government launched multiple rounds of measures to stabilize growth, including more accommodating monetary, fiscal policies and infrastructure development measures. The Central Economic Work Conference in December 2022 signaled that the macro policy this year is expected to continue to maintain a pro-active stance. However, given the expansionary macro policies in 2022, there may be difficulties in balancing the measures to promote economic recovery this year while ensuring effective prevention and the resolution of major economic and financial risks.

Third, from the second half of 2020 to the summer and autumn of 2021, a series of strict regulatory measures were launched to tackle the financial risks in the real estate sector, strengthen the antitrust regulation for the internet platforms, crack down on irregularities in the private tutoring sector, and introduce strict restriction of energy consumption for individual provinces and regions. There are complex reasons for these regulatory measures, and they have attained some positive results. However, the measures have weighed on economic growth. The Central Economic Work Conference in December signaled greater efforts to fine tune the policies. The current policy is now obviously more accommodating. But we must wait and see how much the policy adjustments can yield positive results.

Fourth, banking on the international competitive edge of China's manufacturing industry, China's foreign trade volume has exceeded levels of $5 trillion and $6 trillion over the past three years. The faster growth of exports has pushed up the nation's trade surplus, with external demand contributing to 25 to 30 percent of economic growth. In 2021, the United States and other Western economies were hit by the highest level of inflation in 40 years, forcing policymakers to put in place a tightening monetary policy from the end of the year. The policy tightening has led to a sharp economic slowdown and mounting risks of recession, which has resulted in a drop in demand for Chinese exports. China's exports in dollar terms fell in October and the decline further expanded in November. In this context, most analysts believe that the contraction of external demand in 2023 will become a drag on China's economic growth. However, the exact extent of the downturn in the West and global economies in 2023 remains uncertain. In addition, China's trade policies, local governments, and businesses will all adjust their responses to adverse changes in the external environment.

Finally, the lack of vigorousness in China's economic growth is not an entirely new problem confined to the pandemic period. In 2018 and 2019, senior officials pointed out, on different occasions, that the Chinese economy was facing real downward pressure. There are undoubtedly complex reasons behind the lingering downward pressure on China's economy, including changes in the external environment, especially China-US relations, China's evolving demographic structure, and a decline in the potential growth rate of the economy at a relatively high growth stage. In addition, another factor that deserves strong attention is the vitality of the private sector, which has been an important engine for China's growth since the launch of reform and opening-up. There has been a change of opinion in relation to the private economy in recent years that has inhibited its growth. This, coupled with the difficult environment for businesses to conduct their operations during the pandemic, has weakened the enthusiasm for private companies to make new investments and people to start new businesses, which has held back economic growth. This development has caught the attention of policymakers. The Central Economic Work Conference in December reaffirmed the nation's commitment to unswervingly consolidate and develop the public sector and unswervingly encourage, support, and guide the development of the non-public sector, making work on this front one of the key tasks for the country's economic work in 2023.

The new policy signals will have an effect. But there are deep-rooted problems, and it remains to be seen whether there can be substantial improvement soon.


From: China Daily Global | 2023-01-10