This issue of Caixin Weekly comes out during China’s “Two Sessions.” It has been about two months since China eased its Covid-19 control policies. What the economy will look like has not only become a common concern for people around the world but also a hot topic at this year’s annual political meetings. China’s economy is recovering — but there are also many pressures that could derail it. For now, the top priority is to put existing plans and commitments into action. As a Western saying goes, “one action speaks louder than a dozen of plans.” A strong implementation of the reform and opening-up policies is pivotal to restoring the private sector’s confidence and stabilizing its expectations.
In the past three years, China’s economy has been hit by multiple waves of Covid. And with many other internal and external obstacles, China’s GDP has grown slower than expected. In 2022, it grew by only 3%, failing to meet the goal set at the beginning of the year. As China pivoted from its stringent Covid control policies, people filled the internet with discussions about the importance of bringing the Chinese economy into “to a reasonable range” or onto “to a normal track.” So, the fact that the central government set this year’s economic growth target at “around 5%” has attracted national attention.
Recent economic data indicates that China’s economy is gradually recovering. The just-released Caixin Manufacturing Purchasing Managers’ Index (PMI) for February came in at 51.6, the highest since July 2022. The Caixin China General Service PMI for the same month climbed to 55, the highest since September 2022. Other promising data has emerged as well.
However, China’s economy still faces many tough challenges. The country’s post-Covid revival is struggling under the “triple pressures” of shrinking demand, supply shocks and weakening expectations — along with a volatile global environment, as mentioned at the Central Economic Work Conference in December 2022. These pressures are deep-rooted, structural problems. They will not simply disappear along with the end of the Covid control policies. Many scholars have also warned of the institutional damage to the country’s economic structure caused by the pandemic. Therefore, many analysts believe that one should be very careful about overestimating the power of “revenge spending.” The road to recovery for the real estate industry, which for years was an engine driving China’s economy, is even bumpier. With stores remaining closed or rushing to find subleases, it is clear that China’s market is still healing from the virus.
The People’s Bank of China, the central bank, recently issued its monetary policy report for the fourth quarter of 2022. The report stated that the Chinese economy enjoys strong resilience, tremendous potential and great vitality. With China’s anti-Covid regime entering a new stage, the overall environment for consumer spending is improving, leading to stable market expectations and confidence. Coupled with the help of support policies, China’s economy is expected to rebound in 2023. In recent years, Chinese officials, as well as many Chinese government documents, have repeatedly stressed that “the Chinese economy enjoys strong resilience, tremendous potential and great vitality, and the fundamentals sustaining its long-term growth have remained strong.” We agree with this statement. However, this statement has conditions. China’s sound economic fundamentals will be eroded if it fails to react appropriately to its current problems. The current status of the Chinese economy has been achieved through devoted efforts by multiple generations since reform and opening-up began in 1978. The whole process was accompanied by gradual improvements in the socialist market economy. Likewise, for the Chinese economy to expand, deepening reform and opening up is crucial. These include continuing to deepen reforms in state-owned enterprises, land, household registration, housing, education, the health care system and social security, as well as improvements in handling the relationship between the government and the market.
Many market participants are calling for more measures to stimulate the economy, and have pinned their hopes for an economic recovery on macroeconomic tools such as monetary and fiscal policy. While policies often result in juicing the economy in the short term, their longer-term effects are limited and could lead to effects. Since the global financial crisis in 2008, China has used macro-controls to jump-start its economy. However, the results show that the marginal effect of stimulus policies is diminishing — yielding less GDP growth with every yuan spent. This is clearly unsustainable. The downward pressure on China’s economy has existed for several years. Many of the dilemmas and problems Chinese policymakers now face were largely caused by previous rounds of stimulus. And that is exactly why the central government has refused to roll out additional major stimulus measures. In addition, policy tools are not magic. There have limits. Currently, financially troubled local governments with debt problems are resting their hopes on funding from Beijing, while the central government is concerned about the deficit rate and its potential consequences. This unfavorable situation once again reminds us that big stimulus checks are highly unlikely.
With the global economy slowing, China’s economic recovery depends on addressing its internal challenges. The key is to continue deepening reforms and revive private companies’ vitality by expanding domestic demand, particularly of household consumption and private investment. In recent years, the private sector, as well as small and midsize enterprises, has run into many difficulties. Their confidence and expectations are weak. In view of this, the Central Economic Work Conference specifically pointed out that there should be no irresolution about consolidating and developing the public sector and no irresolution about encouraging, supporting and guiding non-public sector development. The conference also pledged to “treat state-owned and private enterprises equally, support the private sector through both policy and the news media, and provide law-based protection for the property rights of private enterprises and the interests of entrepreneurs.” Before this year’s two sessions, members of the Chinese People’s Political Consultative Conference, the country’s top political advisory body, had already proposed that the Private Sector Protection Law be formulated with all haste. Such proposals deserve special attention.
In fact, people are aware of China’s growth potential and its current problems, and there is no doubt about the measures imposed by the central government. The key is to put words into action as soon as possible. We should also acknowledge that there is a phenomenon of diminishing marginal effects when it comes to promises and commitments. Word do not matter; acting at once is crucial.
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