China’s economy grew 2.5 percent in the first half of 2022 and 0.4 percent in the second quarter, posting positive growth amid downward pressure, according to data from the National Bureau of Statistics. China’s economic recovery will likely pick up speed in the second half of the year with better containment of the novel coronavirus and policy stimulus still taking effect. That said, the recovery faces new challenges, compared to 2020 where the sudden onslaught of the COVID-19 pandemic dealt a heavy blow to the economy.
For starters, insufficient demand has become a major problem since the beginning of 2020. The recovery of demand lagging production has become a fundamental feature of the Chinese economy. The slow recovery in consumer demand has become all the more evident since the beginning of this year. In the first half of 2022, retail sales of consumer goods in China fell 0.7% year-on-year, reflecting slower growth in consumer spending per capita. Additionally, the strong recovery in manufacturing investment has now slowed due to rising energy and labor costs. Insufficient consumer demand is limiting China’s economic recovery.
The COVID-19 pandemic has also changed the behavior of small businesses. As the pandemic has dragged on for more than two years, some households and small businesses have exhausted their savings. Businesses tend to make short-term decisions, thereby reducing their investment risks, and consumers are becoming more cautious about how they spend their money.
The structure of the recovery dynamic has also changed. China’s economy shrank 6.8% in the first three months of 2020 due to the pandemic, but quickly recovered to post 3.2% year-on-year growth in the second quarter. Besides strong political support, such a rapid recovery is the result of a booming digital economy, a booming real estate market and a strong rebound in exports as China took the lead in the fight against the virus. . Today, the country faces a slowing platform economy, slow and prolonged growth in the real estate market, and shrinking space for export expansion. China urgently needs to cultivate new engines of growth and strengthen the momentum of recovery.
China also faces a more complex and austere external environment, with rising inflation becoming a global trend. The US consumer price index rose 9.1% from a year ago in June, a new high in 40 years. To tame the rapid and persistent inflation, the central banks of the world’s major economies, such as the US Federal Reserve, accelerated the pace of interest rate hikes and reduced their massive balance sheets, which led to a rapid increase in the debt pressure and in particular increasing the risk of stagflation and economic recession. A slowdown in global economic growth will lead to a contraction in international market demand, narrowing the space for an expansion of Chinese exports and undermining China’s economic and financial stability with increased capital flows and volatile exchange rates. exchange.
China’s economic growth has been slowing since 2010, mainly due to a decline in the potential growth rate on the supply side. This constitutes what we call “the new normal” of China’s economic development. Now, the changes on the supply side continue while the demand side also changes. Growth-friendly policies should focus on increased efforts to boost domestic demand, energize market entities and foster new engines of growth.
The intrinsic momentum of sustained growth should be strengthened. Expanding effective investment remains key to accelerating economic recovery. China should take full advantage of the central role of investment and continue to support investment in infrastructure projects related to water transport and conservation, so as to address the weak links critical to the livelihoods of the population. China should also step up its efforts to stimulate consumption by implementing short-term stimulus policies, such as reducing the purchase tax for certain passenger vehicles, supporting the consumption of new energy vehicles and the construction of charging stations for electric vehicles, and the granting of subsidies for trade. in old appliances for new ones.
To unleash its enormous consumption potential, China should accelerate the reform of its hukou (household registration) system, achieve full coverage of basic public services at an accelerated pace, and accelerate the granting of permanent urban residence to people moving from rural areas to cities. The research results show that the per capita consumption expenditure of people moving from rural areas to cities will increase by about 30% when they obtain permanent urban residency.
One of the most important tasks right now is to unveil reform measures that can boost market confidence. Affected by internal and external factors, China’s platform economy has been in decline since the second half of 2021. Special campaigns to rectify the platform economy should be turned into regular monitoring. Clear and positive signals must be sent to encourage the healthy development of the platform economy. Both green and red lights must be in place to give market players clear expectations. In the meantime, companies in the platform economy should be encouraged to participate in the country’s major science and technology innovation projects to make the most of their role in accelerating breakthroughs, in order to advance the China’s industrial technological progress.
More sustained efforts must be made to foster new engines of economic growth. China’s digital transformation covers more areas, ranging from consumption to manufacturing, and an industrial ecosystem based on the industrial Internet is emerging at a faster pace. It is time to fully unleash the momentum of structural growth born of industrial transformation and upgrading. In addition, China’s installed renewable energy capacity has exceeded 1 billion kilowatts. In the first half of 2022, the production of new energy vehicles and solar cells increased by 111.2% and 31.8%, respectively. Given the robust growth of new energy, new opportunities lie in the country’s green transformation.
Source: China Daily