China struggles to contain Omicron impact and stabilize economy – Analysis – Eurasia Review
By Yu Yongding*
China’s GDP growth rate has been declining since the first quarter of 2010. After more than 40 years of breathtaking growth, it’s no surprise that the Chinese economy has lost some steam. After falling steadily from 10.6% in 2010 to 6% in 2019, it remains to be seen whether Chinese growth will continue to decline and at what level it will stabilize.
Some in China argue that the decline in economic growth was an inevitability caused by long-term structural factors. Others argue that to avoid a financial crisis, China has prioritized reducing its debt ratio, even at the expense of growth. But, while acknowledging the role played by structural problems, the continued decline in China’s GDP growth rate is largely attributable to China’s premature abandonment of expansionary fiscal and monetary policy due to exaggerated fear. financial instability.
The steady decline in the growth rate does not demonstrate the inevitability of China’s economic decline. This is actually a self-fulfilling prophecy. A lack of determination to implement counter-cyclical policies will cause permanent damage to China’s growth potential, thereby weakening its financial stability.
At the beginning of 2022, COVID-19 subsided in China. The consensus is that China’s macroeconomic policy should aim to stabilize GDP growth. For the first time in many years, the Chinese government has set a GDP growth target of 5.5% for 2022. The economy got off to a good start in early 2022, until the Omicron variant hit Shanghai in March.
China’s consumer spending, measured by total retail sales of social goods, rose 6.7% year-on-year in the first two months of 2022. But it fell 11.1% and 6.7% in April and May. China’s fixed asset investment growth has also slowed significantly.
The only solace came from international trade. In May 2022, the growth rate of exports was 16.9% while that of imports was 4.1%, implying that the growth rate of net exports was very high. But this pattern of growth was neither sustainable nor desirable.
In the first quarter of 2022, China recorded a growth rate of 4.8% year-on-year, which is rather disappointing. The GDP growth rate for the second quarter is an even more disappointing 0.4%.
Compared to other economies, China’s inflation rate is still moderate. The consumer price index (CPI) rose only 2.1% in May. China’s Producer Price Index (PPI) in May is 6.4%. While this figure is still concerning, it has halved from its peak in October 2021.
The main challenge for China’s economic growth is to recover the loss of growth since March and achieve a growth rate close to the 2022 target of 5.5%. China has no choice but to use expansionary fiscal and monetary policy to stimulate the economy. The statistics that have just been released show that this is exactly what the government is doing
Given weak consumption and investment demand and the difficulties facing small and medium-sized enterprises, the Chinese government may need to adopt an even more expansionary fiscal and monetary policy. But implementing this policy will involve a series of challenges.
The implementation of an expansionary fiscal and monetary policy is constrained by the pandemic and China’s strategy to fight against COVID-19. Supply chain disruption cannot be solved by fiscal and monetary policy alone, no matter how expansionary. The most acute challenge for China is how to balance control of the COVID-19 pandemic with economic growth.
As the People’s Bank of China (PBOC) continues to ease its monetary policy, the Federal Reserve is accelerating its monetary tightening. The tightening of Sino-US benchmark interest rates led to increased capital outflows and a depreciation of the RMB despite China’s large current account surplus. China should closely monitor the RMB exchange rate and cross-border capital flows. But a flexible exchange rate and some capital controls should be enough for the PBOC to maintain monetary policy independence and ensure financial stability.
Inflation could be an issue with China’s high PPI. But due to weak consumption and investment demand, PPI inflation has not yet translated into CPI inflation.
Because of Ukrainian War and tougher sanctions on Russian oil and gas, energy and food prices could increase further. As the world’s largest trading nation, Chinese manufactured goods rely heavily on imported parts and components. Higher prices for intermediate products in the United States and other advanced countries will feed through to Chinese price indices. China should partly regain its growth momentum. But when the downward pressure on inflation created by weak aggregate demand is reduced, inflation in China could worsen rapidly. China may have to learn to live with a higher rate of inflation, as the Chinese government’s top priority is to halt the gradual but steady decline in the GDP growth rate.
Despite many pandemic-related setbacks in early 2022, China should be able to do better in the second half of 2022. It is important to note that China’s long-term growth prospects are still bright.
*About the author: Yu Yongding is a Senior Fellow at the Chinese Academy of Social Sciences and a former member of the Monetary Policy Committee of the People’s Bank of China.
Source: This article was published by East Asia Forum