China needs to be the ballast to lead global economic growth
Facing mounting headwinds to stabilize economic growth, China still has space to ramp up policy support, fiscal stimulus in particular, to fire up economic activity by stimulating market demand and supply, which has shown clear signs of weakness recently.
To work in tandem, the country needs to remove a lingering dilemma surrounding control of the COVID-19 pandemic. A balance between coronavirus suppression and economic development ought to be struck, promptly, as the highly infectious but less lethal Omicron variant keeps spreading sporadically around the country.
Currently, it is necessary for the government to crack a hard nut for the purpose of bolstering public morale and business confidence, by taking immediate and effective measures to drastically bring down coronavirus infections in Shanghai, the largest and most important industrial hub in China. The city of 25 million has been locked down for nearly four weeks now, creating an increasingly severe impact on supply chain flow in the country.
Shanghai’s Omicron daily caseload averaged at more than 18,000 last week, unnerving broad market sentiment. Only after the virus’ community transmissions and infections in the city are curtailed and extinguished, could large-scale manufacturing activity restart, generating much-needed parts and components for tens of thousands of assembly lines in the Yangtze Delta industrial zone – a major engine of Chinese economy.
Suffering under elevated infections and continuous lockdown of Shanghai, China’s A-share market was thrashed again last week. By Friday, the Shanghai composite stock index has plunged by more than 500 points in less than four months from over 3,600 points at the beginning of this year. The share prices of many companies were halved. The evaporation of tens of trillions of yuan of investors’ wealth will inevitably undercut households’ consumption and weigh heavily on the country’s GDP growth.
The country’s 4.8 percent economic growth rate in the first quarter of 2022 was higher than the consensus forecast, thanks to Chinese consumers’ robust consumption and explosive exports around the Spring Festival holidays in early February.
However, retail consumption showed a reversed trend and contracted in March, because the incessant Omicron resurgences in Xi’an, Shenzhen, Changchun, Shanghai, Suzhou and other metropolises which led to strict pandemic restrictions that curbed people’s free movement and dented goods and services consumption as well as industrial production.
In the latest World Economic Outlook published last week, the IMF estimated China’s GDP would only grow by 4.4 per cent in 2022, which is 1.1 percentage points lower than the Chinese government’s target of around 5.5 percent set at the annual National People’s Congress session.
The IMF said that China still has room to reach into its policy toolbox to ease the monetary and fiscal policy, and pump more liquidity into the system to help avert a credit crunch, a result of the stock market plunge.
And, to curb a rapid decline in fixed asset investment, the Chinese government should not hesitate to stick to the proactive fiscal and monetary policy by channeling more public funds and private investment into important areas of the economy, including infrastructure, high-tech innovation and industrial digitalization projects, and social welfare. Policy support could include providing direct transfers to the vulnerable households.
New technology industries like new energy vehicles, artificial intelligence, industrial robots and 5G-powered mining, transportation, catering and entertaining endeavors will continue to provide a strong source of economic growth. Technologies that help China to move closer to carbon neutrality will also provide growth support.
Also, the country ought to vigorously develop its real estate sector, another powerful driver of the economy, which suffered throughout 2021 due to tightened government regulation to curb prices. As a result, some property developers, most notably Evergrande Group, defaulted on its debt repayments. In 2022, the government needs to back up the real estate sector and help push up commercial property sales to enliven the important sector.
By all metrics, China faces much less pressure to curb inflation than other economies, such as the US and many European countries. So, the People’s Bank of China, the central bank, ought to be more audacious in cutting commercial lenders’ reserve requirement ratios, and the benchmark interest rates to ensure sufficient money market liquidity, so as to cut the borrowing costs of tens of thousands of Chinese enterprises.
China recorded annual real GDP growth of 8.1 percent in 2021, one of the highest rates in the world. For most countries it would be an enviable achievement. However, for China, this return to high growth was largely a consequence of the rebound from growth of a meager 2.3 percent in 2020. Therefore, more painstaking efforts should be taken this year by the country in order to realize the around 5.5 percent real growth rate.
In addition to the COVID-19 pandemic and the US-China tariffs war, two more uncertainties are arising on the global horizon that could have profound implications for the recovery of the world’s broad economy. One is the conflict between Russia and Ukraine, which may prolong and even escalate to something like a direct confrontation between the US-led West alliance and nuclear-armed Russia.
The other is the US Federal Reserve’s increasingly hawkish moves to raise interest rates to control the country’s runaway inflation. Higher rates in the US will undoubtedly attract more capital to flow to the Wall Street. So, monetary tightening by the US will continue to create a very disruptive ripple effect on bonds and equities stability in developing economies, including China. And this merits the attention of policymakers.
China should be the ballast to lead growth. The global economy is becoming increasingly integrated, as any variations in public health, geopolitics and macro-economic environment – mirrored by the pandemic, the Ukraine crisis, and the surging inflation in the US, are to impact China’s growth prospect. But as the world’s second largest economy, to achieve continued robust growth is significant, not only for China itself but for many other countries.
Source: Global Times