Stabilizing demand key to growth in H2

Facing “shrinking demand, supply shocks, and weakening expectations” as well as the impact of the resurgence of COVID-19 cases, China has not been easy to see its economic growth has performed the way it did; and generally speaking, the Chinese economy has stabilized with upward momentum.

In the first half of this year, China’s economy expanded 2.5 percent year-on-year to 56.26 trillion yuan ($8.33 trillion). The growth rates for the first and second quarters were 4.8 percent and 0.4 percent, respectively.

The government’s fiscal expenditure and efforts to boost infrastructure investment have played a supportive role in stabilizing economic growth.

In the second half, there will be huge pressure from flagging demand, and government efforts to stabilize growth are more urgently needed.

In 2020, despite the impact of the pandemic, real estate and exports played a significant role in supporting economic growth.

And last year, support from the real estate sector weakened, but export support remained strong.

However, this year, consumption and real estate have been relatively weak, and exports also face uncertainties from the cooling global economy.

Despite value-added industrial output, the Purchasing Managers’ Index and the index covering logistics all improving month-on-month in the first half, which indicate a fast recovery on the supply side, recovery in demand was much slower, and has weighed on economic growth in the period.

Currently, we should be alert to the interplay between shrinking demand and weakening expectations.

In the second quarter, the government exerted diligent efforts, not only using general fiscal expenditure measures but also by increasing infrastructure investment and issuing government bonds, which supported the stabilization of growth, investment and credit.

In the second half, efforts in the government sector will determine the pace of economic recovery, as no sign of obvious recovery impetus has been evident in the private sector and overseas demand for Chinese products is likely to soften.

As the global economy cools with the US Federal Reserve raising interest rates and global financial conditions tightening, it is difficult for China’s exports to post a standout performance.

In addition, our research also shows that around 70 percent of the nation’s export growth was attributable to higher selling prices. Amid surging costs for imported raw materials, export growth doesn’t always translate into corporate profits, nor is there a positive correlation between export growth and performance of manufacturing investment.

Moreover, the negative impact on the economy from the real estate sector is continuing, and the core issue in the sector is potentially risky levels of leverage of property developers.

The balance sheets of many real estate companies indicate serious problems, and it will be difficult for many property developers to solve such problems all by themselves or through a few months of sales recovery.

The government must roll out a systematic solution as soon as possible to solve the problems, although year-on-year growth data of the real estate industry will probably start to rebound in the second half.

That is because data will likely improve on the low comparison base last year — this round of adjustments in the sector started in the second half of last year.

A systematic solution should include measures such as mergers and acquisitions, housing loan interest rate policy adjustments and repositioning of real estate market development.

In the second half, infrastructure will be a key pillar for stabilizing growth, since we must be prepared for the probability of a relatively weak performance of consumption, real estate industry and exports.

When market demand stays weak, it is important to increase government spending, because it will lead to increases in incomes, which will provide necessary support to aggregate demand growth and economic vitality.

The plan to issue 300 billion yuan worth of financial bonds, announced by authorities on June 29, is the right way to fund infrastructure projects because of the low cost, long-term cycle, and fewer side effects compared with financing for infrastructure projects through commercial financial institutions. Such government spending should be expanded.

Throughout last year, pork prices remained at a low level, which meant pressure on the Consumer Price Index during the second half will mainly come from the low comparison base seen last year.

The core CPI mainly reflects domestic demand, which then depends on government spending.

In the next six months, the key issue will be the struggle between insufficient demand and lack of growth impetus, not inflation.

The consumption recovery has been sluggish for four or five consecutive quarters, which will likely have a marginal impact on the economy. If consumption recovery accelerates, it will spur economic growth.

To improve aggregate demand, especially consumer demand, a most direct way is to raise cash flow in the residential sector, either through distributing cash or subsidies, or negative income tax.

As it is not certain if global demand will severely decline, efforts via government spending must be sustained.

The risks disclosed recently in the property sector must be properly handled as soon as possible to avoid spillover effects, although they probably won’t produce uncontrollable risks to the financial system.

There is also ample room for coordination between monetary and fiscal policies.

Efforts have been made to leverage the government budget to influence the economy, and going forward, it is worth exploring whether it is possible to innovate some new fiscal policy measures, especially those supporting infrastructure through development finance, such as the plan for China to raise 300 billion yuan ($44.3 billion) through the issuance of financial bonds to support the construction of major projects and expand effective investment.

As central banks of many developed economies have raised interest rates to curb inflation, such moves are expected to generate an impact on the Chinese economy.

For instance, reduced external demand for Chinese products will influence the performance of China’s exports, and there could also be the risk of foreign capital outflows.

However, all those factors are external and will not have a decisive influence on the performance of the Chinese economy in the second half. The real decisive factor is whether domestic demand will become stabilized.

If there is no resurgence of the COVID-19 pandemic in China during the second half, the force pressuring Chinese economic growth will be smaller than that in the first half.

The writers are Zhang Bin, a senior research fellow at think tank China Finance 40 Forum and researcher at the Chinese Academy of Social Sciences’ Institute of World Economics and Politics, and Zhu He, a CF40 research fellow and vice-director of the think tank’s research department. The views don’t necessarily reflect those of China Daily.

CAI MENG / CHINA DAILY