Greater Shift In China’s State Of Affairs: Issues Mounts In Economic Growth – Analysis

By He Jun*

With the Two Sessions, China’s biggest political gathering of the year ended, the next major political event of the country would be the 20th National Congress this autumn. By convention, the Chinese leadership will be partially replaced after the National Congress. Premier Li Keqiang stated at the Two Sessions press conference that this year will be his last year as premier. There is no doubt that 2022 will be a year of huge changes in China’s politics.

Correspondingly, what will happen to China’s economy this year? Based on the country’s challenging domestic and international scenario during the last two years, China’s economy is unlikely to be easy sailing in 2022. A more likely scenario is that its economy will confront significant difficulties. Following the low base impact caused by the COVID-19 pandemic, the country’s economy will undergo several changes.

According to the government’s work report, the main expected goals for this year’s development include GDP growth of approximately 5.5%; more than 11 million new urban jobs created, Urban Surveyed Unemployment Rate to be controlled within 5.5% throughout the year; CPI growth at about 3%; synchronization of the citizens’ income growth and economic growth; imports and exports have been stabilized and improved with the balance of payments stable. Other goals include grain output to remain above 1.3 trillion kilograms; improvement of ecological environment with a continuous decline in major pollutants. Furthermore, during the 14th Five-Year Plan period, the country’s energy consumption intensity target will be assessed as a whole while some flexibility will be maintained, and the newly included renewable energy and raw material energy consumption will not be included in the total energy consumption control.

In terms of fiscal policy, the deficit ratio this year is planned to be around 2.8%, which is lower than last year. For China, the fiscal expenditure in 2022 has expanded by more than RMB 2 trillion over last year. The central government’s expenditure at its own level will increase by 3.9% this year, of which the central department’s expenditure will continue to grow negatively. Transfer payments from the central government to local governments increased by about RMB 1.5 trillion, with a scale of nearly RMB 9.8 trillion, an increase of 18%, the largest rise in many years.

The economic development for China this year will be centered around the target of 5.5% growth. This is the first time in more than three decades that China has set its annual economic growth target below 6%. Although it is not news that the country’s economy has entered the stage of medium-high growth from high-speed growth, it is still a major event for the Chinese economy to set the growth target at the level of approximately 5%. As the world’s largest emerging market country, China’s economy is comparable to a heavy-duty train with many structural problems. It must maintain a certain speed; if it is too slow, some components of the train would fall off. Furthermore, China is dealing with an ageing population before the country amassed adequate wealth. Under such circumstances, its most fundamental task is to maintain steady growth.

In the past two years, the global economy has been impacted by the COVID-19 pandemic. Facing such disturbance, ANBOUND proposes that China’s economic status should be evaluated based on a three-years average. We also noted that, owing to the low base impact, 2021 will have the greatest economic growth rate in three years, but that the most crucial economic growth rate will be in 2022, which will define the country’s future economic growth condition. National policy-wise, China’s economic challenges will also be taken into account in terms of national policy. In 2020 and 2021, the two-year average growth rate of China’s economy was 5.1%. By the end of 2021, its GDP reached RMB 114 trillion.

In the last 10 years, China’s economic growth has slowed. During the period of the 18th National Congress, China’s economic growth rate dropped from 7.7% to 6.7%; and during the 19th National Congress, it continued to slow down to 5.1% (based on the two-year average growth rate from 2020 to 2021). Between the years, China’s economic growth rate fell by 2.6 percentage points. Except for the 8.1% growth rate in 2021 due to the base effect, there is basically a linear downward trend. It must be admitted that for China, with a population of more than 1.4 billion and an increasingly aging at that, a significant slowdown in the economic growth rate of 2.6 percentage points in the past decade presents a daunting challenge. If the usual feature of an economic recession time is a “generalized loss in economic vigor,” China’s economic recession danger cannot be overlooked.

To counter the impact of the pandemic and stabilize economic growth, the Chinese authorities have adopted various economic policies in recent years, and the list of that include proactive fiscal policy, new infrastructure, internal and dual circulation, high-tech and low-carbon development, and so on. All these approaches are aimed at achieving the balance between stabilizing growth, structural adjustment, and risk prevention. At the Two Sessions this year, Premier Li used the metaphor of “mountain climbing” in describing the economic growth rate of 5.5%.

According to the size of China’s economy 10 years ago, an increase of 10% growth would require RMB 6 to 7 trillion; however, the same rise would demand RMB 9 trillion now. It’s like climbing a 1000-meter mountain; if you just need to climb 10% of the way, 100 meters will suffice. Yet, in climbing a 3,000-meter mountain, to climb 5% would mean one has to climb 150 meters; and the conditions for climbing will also change. The climber has to face lower air pressure, and lesser oxygen, as one climbs higher. The pace would seem to slow down, yet the climber is actually going higher.

What Premier Li described is indeed the actual situation. However, it should also be noted that as the base number increases, if the economic growth slows down at this time, the resulting gap in economic growth will also be bigger. For instance, for a base of 100 trillion, a 2.6-percentage-point slowdown in growth would result in a 2.6-trillion increase in the disparity.

China has actually benefitted from the pandemic in the past two years, because on the one hand, it has strengthened its position as the “world’s factory” due to its effective pandemic preventive measures, and on the other hand, the United States and other countries have launched macroeconomic stimulus plans which have in turn increased global demand, thereby boosted China’s exports and improved its economic growth. In RMB terms, the import and export of goods for China in the whole year of 2021 increased by 21.4% year-on-year. Among them, exports increased by 21.2% year-on-year, imports increased by 21.5% year-on-year, and surplus increased by 20.2% year-on-year. The pull of the external market is an important reason for its two-year average growth of 5.1%.

If the aforementioned distinguishing factors boosting China’s export development fade away in 2022, as we predicted before, the country’s economic momentum may diminish. In fact, signs of this are already starting to appear. According to data from China’s General Administration of Customs, in the first two months of 2022, the imports and exports increased by 13.3% year-on-year. Among them, exports increased by 13.6% year-on-year, imports increased by 12.9% year-on-year, and trade surplus rose by 16.3% year-on-year. Compared with the foreign trade data for the whole year of 2021, the year-on-year growth rates of import and export, export, import and surplus in the first two months of this year have slowed down by 8.1, 7.6, 8.7 and 3.9 percentage points respectively.

In addition to changes in foreign trade, the recovery of domestic consumption in the past two years has remained sluggish, which drags down the overall economic recovery. Judging from the data, in 2021, the total retail sales of domestic consumer goods was RMB 44,082.3 billion, an increase of 12.5% over the previous year, and the average growth rate for the two years was only 3.9%. At the Two Session this year, Premier Li admitted that the current consumer demand is indeed relatively weak, mainly due to the weak offline consumer demand. If a large number of companies are closing down, it will severely take hold of market vitality and the living standards of the people.

Furthermore, the impact of the Russia-Ukraine war is a new shock factor that the Chinese economy will face. This war of unknown duration will significantly drag down the European economy and, to a certain extent, the Chinese economy as well. If we consider the deteriorating geopolitical context in which China will be operating in the future, economic growth this year or even in the next years may be put under much more strain.

All in all, China’s economic growth is facing multiple challenges this year. If the 5.5% growth target can be truly achieved, this will be considered a satisfactory economic achievement. However, against the historical backdrop of China’s economic development, this is not an impressive figure. On the contrary, it is worth noting that China will be in a process of continuous economic slowdown for a long time to come. The rate of 5.5%, while being the lowest target in years, is still a difficult figure to achieve. In the later years of the 14th Five-Year Plan, China’s economy may need to strive to maintain a 5% growth.

*He Jun, Partner, Director of China Macro-Economic Research Team and Senior Researcher. His research field covers China’s macro-economy, energy industry and public policy.