Overcome insufficient demand to lift growth
‘Insufficient demand’ could be the key to summarizing China’s macroeconomy in 2023. The country has faced insufficient demand since 2021, and this was further aggravated last year.
The analysis of insufficient demand is not based on the country’s growth rate, but on a comparison of supply and demand.
There are two criteria for measuring supply and demand: one is the consumer price level, and the other is the performance of the labor market.
Consumer price levels were stagnant last year, with CPI rising by 0.2 percent and PPI declining by 3 percent, while core CPI remained below 1 percent for four consecutive years, decreasing even further compared to that of 2022.
In terms of the labor market, the surveyed unemployment rate was slightly better than in 2020, but still higher than the level before the COVID-19 pandemic.
There was significant employment pressure on new entrants to the labor market. Meanwhile, the wage growth of migrant workers over the past year was relatively low.
China’s GDP growth rate for 2023 is not low compared with other major economies. But why doesn’t the domestic economy feel very good at the micro-level?
Difficulties, challenges
The Central Economic Work Conference pointed out that the difficulties and challenges include insufficient effective demand, overcapacity in some industries, weak social expectations, many hidden risks, blockages in domestic circulation, and the rising complexity, severity, and uncertainty of the external environment.
Among these difficulties and challenges, insufficient demand should be the primary concern. If this can be addressed, other problems can be largely alleviated.
Boosting demand can provide strong support for resolving overcapacity. Similarly, if enterprises can achieve higher profitability, employment becomes easier and residents’ incomes increase, which will naturally contribute to the improvement of social expectations and boost confidence.
Despite some pessimistic voices, I believe that the most prominent challenge China currently faces is not on the supply side, nor production efficiency or resource allocation.
The most prominent issue in China now is on the expenditure side — how to increase expenditure to overcome insufficient demand.
So, what kind of demand do we lack?
Traditionally, the total demand can be split into consumption, investment, as well as exports and imports.
The growth rate of consumption in China last year exceeded the overall economic growth rate, with consumption’s contribution to economic growth on the rise, while the contributions of exports and investment declined.
Total demand can also be divided into that from the private sector and the government sector, which include government-led expenditures and government-led infrastructure investment projects.
In 2023, the growth rate of government spending was lower than the overall average level and the growth level of the private sector, which showed that the contraction in government demand had a significant impact on the phenomenon of insufficient demand.
In terms of monetary policy, there are three suggestions.
First, to clearly announce to the market the target of achieving a 2 percent core CPI. The clearer and more resolute way in which the country expresses this, the better the effect will be. To announce such an inflation target is akin to telling residents that prices will rise, which will encourage them to consume now.
It is also like telling businesses that prices of goods will rise, leading to rising costs, so they need to invest as soon as possible. It is equal to telling residents that their savings will depreciate, which will encourage them to increase consumption, investment, and reduce savings. It is also an international practice.
Second, to significantly reduce policy interest rates and depress real interest rates. The expansion of spontaneous market demand relies on price leverage, and price leverage is real interest rates.
Third, a total of 2 to 3 trillion yuan ($417 billion) of pledged supplementary lending is needed throughout the year to support major investment programs, such as urban village renovation, affordable housing construction, and infrastructure, that can be quickly remolded for emergency use. Meanwhile, the targeted growth rate of social financing should stand at above 11 percent.
In addition, it is necessary to restore the vitality of the real estate market. The priority is to restore cash flow for real estate enterprises. This can be achieved by measures such as lifting restrictions on home purchases, lowering mortgage rates, offering preferential loan rates to first-time homebuyers, helping developers liquidate idle assets such as commercial-residential buildings and parking spaces.
In short, fully implementing policies in these three areas can help the Chinese economy overcome insufficient demand and achieve reasonable growth rates.
Global practices
When we look at developed countries, the process of industrial upgrading in the manufacturing sector has shown some trends.
The first trend is that the proportion of manufacturing in economic activities tends to show a “humpshaped” change with economic development and per capita income growth.
In the “hump” of different countries, the peak of the hump often corresponds to a per capita income of $8,000 to $9,000 and a manufacturing value-added ratio of 30 percent to 40 percent. After surpassing this peak, the proportion of manufacturing activities in the economy begins to decline.
The second trend is that manufacturing follows similar trajectories of industrial upgrading, starting from the initial stage of the textile industry, then progressing to energy, power tools, and infrastructure, followed by largescale production tools, steel, machine tools, and equipment manufacturing, and finally to hightech products such as telecommunications, computers, and biopharmaceuticals.
Whether it’s the hump-shaped change pattern or the specific path of industrial upgrading, China is highly consistent with high-income countries.
Thus, the success of China’s manufacturing lies in being the most open, fully competitive, and incentive-driven market.
We have a unique scale effect, and the changes in the share of manufacturing in China’s GDP are very close to those of developed countries in the decade after peak industrialization, without a significantly greater withdrawal of manufacturing or premature problems.
Some people may question China’s overcapacity problem during the process. But overcapacity does not equal resource misallocation, nor does it equate to efficiency loss.
According to some researchers, assuming that all enterprises have formed a consensus on the development trend of a certain industry, the specific timing of industry profitability remains unclear, so more mature and efficient enterprises often choose to wait and watch.
They wait until the entry or even demise of medium- and low-efficiency enterprises before entering the market themselves, which will inevitably lead to overcapacity in the interim.
However, this overcapacity does not indicate a failure in resource allocation. In addition, some subsidy policies implemented by the government, if misused, can also lead to overcapacity problems.
To address such problems, it is not advisable to simply limit the number of enterprises joining the industry or restrict production capacity. Instead, the country should rely more on reducing subsidies and providing a market environment open to fair competition. deindustrialization
The writer is deputy director of the Institute of World Economics and Politics at the Chinese Academy of Social Sciences.
The views do not necessarily reflect those of China Daily.