China’s GDP growth slowed during the first three quarters of this year, from 5.3 percent to 4.7 percent to 4.6 percent, raising fears that the country would not achieve its annual growth target of about 5 percent. However, the latest data suggest that China’s economy is finally turning the corner.
Economic activity in China has been relatively weak since the COVID-19 pandemic. This was not unexpected, at least not at first: three years of pandemic lockdowns strained household, corporate and local-government balance sheets. Declining business confidence — partly a response to a regulatory crackdown on finance, the property sector and the platform economy — did not help matters.
In early 2021, when the US emerged from the worst of its pandemic lockdowns, American households quickly began spending the money they had accumulated. Chinese households, by contrast, continued to accumulate savings even after the lockdowns were over: from January 2020 to August this year, household bank deposits in China swelled by 65.4 trillion yuan (US$8.98 trillion), with the wealthy accounting for a significant share.
The Chinese government introduced some supportive policies over this period, but in contrast to past disruptions, it refrained from implementing aggressive stimulus policies, owing to concerns about possible side effects. The massive stimulus package the government introduced after the 2008 global financial crisis spurred growth, but it also fueled a real-estate bubble, drove up local-government debt and reduced investment efficiency.
The government’s calculations changed at the end of the third quarter of this year, when it became clear that China’s economy would need more help to lift its growth trajectory. In late September, People’s Bank of China (中國人民銀行) Governor Pan Gongsheng (潘功勝) unveiled three measures: a reduction in banks’ reserve ratio, a policy-rate cut and the creation of monetary-policy instruments to support the stock market.
Moreover, on Oct. 12, Chinese Minister of Finance Lan Foan announced that new fiscal measures would focus on addressing local-government debt problems, stabilizing the real-estate market, and supporting employment. He followed this announcement early last month with a 10 trillion debt-swap plan for local governments.
Pan and Lan have suggested that more stimulus measures are in the pipeline, with Lan saying that the central government still has plenty of room to increase its debt and deficits. However, recent data on high-frequency economic indicators — which tend to be the quickest to respond to macroeconomic-policy changes — suggest that the government’s actions began taking effect almost immediately.
In October, total “social finance” (total financing to the real economy) was up 7.8 percent year on year, and outstanding bank loans increased 7.7 percent. Retail sales rose 4.8 percent year on year and 1.6 percentage points from the previous month. The manufacturing purchasing managers’ index reached 50.1, after three months of sub-50 readings, and increased again, to 50.3, last month.
In more good news, the surveyed urban unemployment rate slid by 0.1 percentage points in October to 5 percent. Even the property market improved marginally, though land sales and real-estate investment remained weak. If these positive trends continue, GDP growth would probably return to about 5 percent this quarter.
However, the outlook for next year is less clear. If China is to achieve 5 percent GDP growth next year— assuming this is the government’s target — policymakers would have to overcome three key challenges, starting with stabilizing the property sector, which contributes about 20 percent of GDP growth and accounts for 70 percent of household wealth.
The second challenge is local governments’ balance sheets. A shortage of funds has lately been driving local authorities to cut spending, such as by reducing officials’ salaries, and grasp for revenues, such as by chasing corporate back taxes and even detaining private entrepreneurs from other regions. None of this is good for growth.
The fundamental problem is that spending responsibilities now exceed fiscal revenues, which are no longer being bolstered by land sales and local-government investment vehicles. The central government must urgently transfer a significant amount of general-purpose revenue to local authorities. More fundamentally, China needs to reconfigure the balance of fiscal responsibilities across levels of government.
The third major challenge is US president-elect Donald Trump, who has vowed to impose 60 percent tariffs on all imports from China during his first year in office. Given that China’s exports to the US account for 3 percent of its GDP, such tariffs — and even much lower ones — would have a material impact on next year. The investment bank UBS, for instance, predicted that China’s GDP growth would slow to 4 percent next year.
There has been much debate in China over whether the economy needs structural reforms or more macroeconomic stimulus. The truth is that it needs both. A decisive stimulus package, with a robust fiscal-policy component, must come first; this would make the biggest immediate difference. However, once the package is in place, the government should turn its attention to structural reforms, with a focus on boosting confidence among consumers, investors and entrepreneurs.
Over the past year, the Chinese government has published several policy documents aimed at restoring confidence. However, with market participants not fully convinced, it must go further, implementing — boldly and visibly — some of the measures it has announced, such as stronger protections for private enterprises. Reining in local officials’ scrutiny of old tax records in search of missing payments would also go a long way toward strengthening business confidence.
Huang Yiping, dean of the National School of Development and a professor at Peking University, is a member of the Monetary Policy Committee of the People’s Bank of China.
Copyright: Project Syndicate
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