Yu Yongding argues that, desite the Chinese economy's apparent recovery, fiscal and monetary expansion are still urgently needed

Yu Yongding argues that, desite the Chinese economy's apparent recovery, fiscal and monetary expansion are still urgently needed

China’s economy seems largely to have bounced back from the COVID-19 shock. It registered 4.9% annual growth in the third quarter of 2020, and the rate may well exceed 5% growth in the fourth quarter. The result would be at least 2% annual full-year growth – not bad at a time when much of the world is facing a pandemic-induced recession. But that doesn’t mean smooth sailing ahead.

Consumption growth is a key consideration in determining China’s likely overall performance in 2020. While final consumption figures for the third quarter are not yet available, total retail sales of social consumer goods offer a useful proxy. Unfortunately, the picture is not particularly bright: though monthly growth in retail sales of social consumer goods has turned positive since August, total sales fell 5.9% year on year in the first ten months of 2020.

The consensus in China is that the annual growth rate of retail sales of social consumer goods will turn positive only at the very end of this year, despite the recovery in household consumption. And past experience suggests that final consumption growth will be even lower. In 2019, for example, the figures were 6.3% and 8%, respectively.

Another key determinant of economic performance is capital formation. Here, we are also awaiting the latest figures. But we do have data on fixed-asset investment. And, again, the news is mixed.

In the first ten months of 2020, fixed-asset investment grew by 1.8% year on year. This growth was driven, first and foremost, by real-estate investment, which grew at a rate of 5.6% during the same period. But real-estate investment has shown signs of weakening.

Moreover, the most important component of fixed-asset investment – manufacturing investment – was down 6.5% year on year in the first three quarters of 2020. Though growth picked up a bit last month, it was still deep in negative territory.

Typically, when GDP growth is lower than potential growth, China’s government uses every possible lever to promote infrastructure investment. After the 2008 global economic crisis, for example, the country implemented a CN¥4 trillion ($609 billion) stimulus package that spurred as much as 44.3% growth in infrastructure investment in 2009.

That hasn’t quite happened this time around – and it shows. Infrastructure investment increased by just 0.2% year on year in the first three quarters of 2020. Growth picked up somewhat last month, but only to 0.7%.

One area where China has exceeded expectations is export performance. Although official data are not yet available, there is good reason to think net export growth may have exceeded 10% so far this year. Yet net exports account for just a little more than 1% of GDP, so the effect on China’s overall growth will be limited.

The aforementioned considerations, together with a bit of guesswork, suggest that in 2020, China’s economy will grow by around 2% – significantly faster than the other major economies, which are facing contractions. But China still faces serious challenges. Two issues stand out: quality employment and fiscal spending.

So far this year, China has created more than ten million new jobs, surpassing its official goal of nine million. But past experience indicates that a GDP-growth rate of 2.5% is insufficient to support the creation of nine million high-quality jobs. And, indeed, many university graduates are struggling to find suitable employment. In fact, China’s massive employment growth this year may well have come at the expense of labor productivity.

On the fiscal front, China needs to spend more. To be sure, the Ministry of Finance estimates that China’s general budget revenue in 2020 will total some CN¥21 trillion, and the budget deficit will be around CN¥3.7 trillion – about 3.6% of GDP.

But this implies that the Chinese government assumed a nominal growth of about 5.4% for 2020, far more than the 3% that is likely (2% annual growth plus a 1%-of-GDP deflator). In this context, the only way to meet the 3.6%-of-GDP deficit target is to cut government expenditures.

In the first three quarters of 2020, China’s government did just that, reducing its general public budget expenditure by 1.9%. But this decrease was dwarfed by the 6.4% drop in public revenue. Moreover, local governments continued to increase their expenditure via local government funds, created to finance investment projects. (In theory, those debts will be repaid by revenues from the relevant investment projects.)

Local governments finance their deficits by issuing their own special project bonds. This year, they were authorized to issue CN¥3.75 trillion in such bonds – a quota they have already met. The central government has already issued its planned CN¥3.76 trillion in government bonds, as well as CN¥1 trillion in COVID-19 relief bonds.

This doesn’t mean China must curb spending further. On the contrary, to cope with the challenges ahead, the government must increase its deficit target and implement a more expansionary fiscal policy, supported by a more expansionary monetary policy.

Such an approach carries minimal risk for China. The country’s public debt amounts to a modest 52.6% of GDP, and there is still plenty of room for the government to issue more bonds to support growth-enhancing infrastructure investment.

Moreover, China’s actual GDP growth rate is below its potential rate; the core consumer price index was just 0.5% in October; and the producer price index has been in negative territory since last July. Add to that the country’s successful containment of COVID-19, and there is little reason to worry that inflation will surge or China’s fiscal position will deteriorate significantly in the foreseeable future. In fact, as failed austerity policies in quite a few countries have shown, the larger risk to China’s fiscal position may come from not spending.

Of course, China’s economy remains beset by deep structural challenges, which the authorities must continue working to address if the economy is to grow consistently in the coming years. But this is beyond the scope of macroeconomic policy.


Yu Yongding, a former president of the China Society of World Economics and director of the Institute of World Economics and Politics at the Chinese Academy of Social Sciences, served on the Monetary Policy Committee of the People’s Bank of China from 2004 to 2006. Copyright: Project Syndicate, 2020, and published here with permission.

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26 Comments

CCP stats not trustworthy.
Working age pop is shrinking in China since 2016
Will grow old before gets above PPP of $12,000 USD

Also China still has to go through a social revolution like most countries already did in one way or another. This is often ignored, but since they have a growing middle class which now travels and see the world beyond their borders, who are more and more aware of social issues and the injustices of the regime, no matter how much they invest in brainwashing the population the issue will just get worse for them.

Hahaha.

If you spend 10 days travelling in China, you would release how brainwashed you have been by the western medias.

Hahahahahahahah...

Your comment is just funny.

As funny as you find it the "you more" technique does not really apply here.

As much as the media works indoctrinating citizens in the west apart than a few dishonorable exceptions it has not reached the level of what's being done to the Uighur people and other ethnicity and minority groups effectively ripping them off of their own culture.

Oh Xingo, you poor indoctrinated soul.

The CCP is just the latest regime to rule China. Like many before them the time will come when they get overthrown.

Remember China was having a civil war only 70 odd years ago.

Tiananmen massacre as the regime put down the democracy movement a mere 30 years ago.

Rapid "growth" has kept the CCP in power. Inevitably this will end, and then change will occur, probably with bloodshed.

one question: been to China before?

Many times, hard to even breath the air there. Feted waterways, rubbish littering the streets. Truly an appalling place.

do you even get a flush on your face when speaking lies?

hahahahah

Hahaha - barring the air quality everything you just listed could be slated home to NZs urban environment. I'd suggest you don't throw too many stones iiwy

Yes I have. I feel very sorry for the Chinese. You included.

B21 to be honest, any brainwashing seems to be administered via western social media aficionado's and eagerly lapped up by the naive and easily convinced consumers of said media. China is China - a large market for NZ produce. Whilst you can bemoan the CCP's dysfunction, at the end of the day China pays a significant level of NZs bills indirectly. Something many people would do well to both realise and accept

Realise yes. Accept; why?

We've used them as a near slave-labour workforce (we couldn't compete, couldn't live on the ' wage'. We also - until they said 'no more' - dumped our rubbish on them. And that pollution over their landscape, was the result of making the stuff we 'buy' from those big-box stores. As for getting 'rich' by 'selling' stuff to them, we really got poorer by reducing soil (quality and quantity), reducing biodiversity, increasing vulnerability (due to monoculturing), reduced water (quality, river's end quantity and aquifer) and polluting ourselves (old landfills, unmarked farm dumps, spray accumulation).

But we got some digits in a bank and bought an SUV. And this is 2020. Wish I had the ability to see so far ahead, so clearly.....

NZ's future is firmly with China's whether you prefer or not.

period.

Ba hhahahahhhah

Or else what?

Or else NZ loses 30% of it's export market and the current Covid setback looks like a "speedbump"

Not

Such propaganda will create the illusion that disasters bring profit.

https://www.youtube.com/watch?v=UBUGlZTvsc4

Disasters always bring profit to someone - never heard of the saying"never let a good crisis go begging"?

Biggest 'issue' not mentioned in article is the fact that more 'stuff' is required to be dug up from the ground to maintain the let alone 'grow' the economy. Given, that stands for any economy on Earth as we know it and isn't a China specific issue.

Yip indeed.

5% growth will mean economy doubles every 14 years.

Where will they get the oil, coal, other raw materials etc., and where will the waste go?

Can't see it happening myself.

You forgot the influence of technology. I remember back in the '90s talk of "peak oil" - barring geopolitics we now have the cheapest oil since then.

The only thing technology can do, is prolong the tail-end of the dreg-extraction.

https://www.advisorperspectives.com/articles/2020/11/30/what-oils-troubl...

https://energybulletin.org/the-energy-bulletin-weekly-23-november-2020/ the graph in the 20 November update is a doozy.

Why don't you do some research? And before you say things like 'cheap oil', read stuff like the first link. That's the difference between you and me. I read, think, then hypothesize. You peddle the story you need to believe.

Agreed, 50% of what consumers buy is waste.

Actually you've got that backwards - 50% of what consumers buy THEY waste.

"One area where China has exceeded expectations is export performance"

According to MFA, China exported over 30 billion face masks to the United States besides other medical supplies. The similar would also apply here; many of the disposable masks we can buy are MIC.

"Of course, China’s economy remains beset by deep structural challenges... this is beyond the scope of macroeconomic policy."

Right there, China knows she is entering in a world where lots of countries are turning on her. She needs to act rapidly to set an example by punishing someone for stopping the trend. And It is the reason why China has worked so aggressively on Australia lately.