The year 2021 will end in less than a month. As usual, China’s Central Economic Working Conference held in December every year will summarize the economic development situation this year and determine the keynote of the country’s economic policy next year. This year is the second year of the “three-year cycle” under the impact of the COVID-19, and the third year China facing dauting challenges, and both the situational judgement and policy adjustments will be highly crucial for it.
On November 30, Vice-Premier Liu He was invited to attend the Hamburg Summit: China meets Europe business conference virtually. He stated that China’s economy continues to recover, and growth, employment, prices of commodities and balance of payments are generally getting back to normal. It is expected that China’s annual economic growth will exceed the expected target. “In 2022, China will maintain the continuity, stability and sustainability of the macroeconomic policy, and make more efforts to stimulate the vitality of micro entities.... we have full confidence in China’s economy next year”, said Liu.
Liu said he is confident about the China economy’s outlook next year, and this is certainly to boost the market’s confidence. As an independent research institution, ANBOUND would like to point out that this year, the Chinese government has announced a gross domestic product (GDP) growth rate target of “above 6%”, which is not very difficult to achieve due to the low base effect of last year. A number of agencies estimate that China’s economy will grow at 8% this year. From a market perspective, if China’s economy is growing at more than 8% this year, it is performing above expectation. However, if growth is between 6% - 8%, it does exceed expectations, but is below market expectation, so this cannot considered to be an optimistic outlook.
Looking at this year’s situation, China’s economy has been under steady pressure to grow in a year of rebound, and the situation is obviously more complicated than expected. We have repeatedly called that China’s economy may be under great pressure in 2022, both after the base effect disappears, as well as the “production dispersion effect” brought about by the global economy recovery and opening up (that is, the transfer and dispersion of orders concentrated in China in the past, and affect China’s exports), in addition to the negative impact of the continuous exposure of many inherent problems in the Chinese economy and the deterioration of risk factors.
The emergence of the Omicron variant also brings new variables to the world economy and the China economy. Virus mutation will forcibly interrupt the opening-up process of countries around the world, and even return to mutual closure. The state of global supply chain obstruction may be prolonged, and the resumption of international travel will become hopeless. These adverse effects will undoubtedly delay the process of global economic recovery. It is worth noting that the Federal Reserve Chairman Jerome Powell has changed his attitude on inflation and abandon the view of “transitory” inflation, which means that the Fed will be more certain to launch tightening policies as soon as possible, which will also have a negative impact on the global economy. It should also be pointed out that although the emergence of the Omicron variant will continue to “benefit” China through maintaining orders made in the country and China will see export growth. Yet, the overall impact of the virus mutation on the China economy still does more harm than good.
The downward pressure on the China economy is a kind of systemic pressure, which cannot be alleviated by one or two fiscal policies or monetary policy adjustments alone. In particular, it is necessary to clearly recognize that the challenge facing China’s economy is that internal risks are greater than external risks, and long-term structural problems are greater than short-term volatility. This will have an impact on debt risks, increasing aging population, private economic development, and “dual-carbon” targets. This also means that in 2022, an extremely critical year, the country must fully mobilize various resources and policy tools to ensure that the economy will not stall significantly.
To this end, in terms of macro-policy, it may be necessary to work hard on both fiscal policy and monetary policy next year to influence the market with a more aggressive policy brass, and to guide the market with more flexible policy actions to ensure that the economy truly achieves “stable growth”. It is necessary to calmly realized that, as the largest developing country, China is under the complex context of economic structural transformation, adjustment of development methods, the impact of COVID-19, and restriction of the “dual-carbon” target. Without necessary economic growth rate, all development will lose its foundation, and many transformation plans may have to be avoided. With this in mind, Chinese economist Yu Yongding suggested that China should pursue a higher economic growth rate as much as possible and this view is justified. If China’s economic growth rate is at a level of 4%-5% for a long period of time, it may be very difficult to increase the economic growth rate in the future.
As a “staunch” of China’s development, ABOUND proposed a “pyramid model” for China’s long-term economic growth about 10 years ago: starting in 2012, China’s economic growth rate has declined at a rate of 1 percentage point per decade, slowing down along a range of 7%, 6% and 5% over three decades. This will be a more robust and balanced pattern of long-term economic growth that will take into account the needs of a wide range of sectors, from production to consumption, including speed, quality, employment, ageing, transformation, and debt. However, judging from the current situation of China’s economy, the real economic growth slowdown is already a decade ahead of the model’s estimate. At present, many institutions predict that China’s economy growth rate may fall below 5% in 2022 and only about 4.7%. If this is the normal growth rate after the base effect caused by the pandemic disappears, that would require China to be vigilant. At such a low growth rate, not only is it difficult to balance the above-mentioned balances, but the economic gap between China and the United States may also widen.
Final analysis conclusion:
For major powers, the design and selection of policy tools are a technical issue. The key is to have an objective prediction of the situation, formulate the basic strategy and determine the appropriate policy. In 2022, which is critical to China’s 14th Five-Year Plan, the focus of fiscal policy and monetary policy may need to be clearly shifted to steady growth.
