“Bottom-line thinking” is a term that has become a buzzword in China in recent years. The country's transition from high-speed growth to high-quality development is a period of high risk, and with this, it has been frequently stated that there is a need to “adhere to bottom-line thinking and achieve a long-term balance between stable growth and risk prevention”. Similar words are expressed when it comes to the safety and stability of the industrial and supply chains, as well as in the coordination of financial support for technological innovation to prevent financial risks.
In the Chinese context, the usage of the term “bottom-line thinking” refers to decision-making based on the worst possible scenario and fully considering the possibility of risks. In the age of anti-globalization and the era where geopolitics dominates the world, maintaining bottom-line thinking is undoubtedly a kind of risk awareness.
Figure: China’s Year-on-year GDP Growth for Q3, 2001 - 2022
Source: National Bureau of Statistics, chart plotted by ANBOUND
The bottom-line state refers first and foremost to the risk of China's economic stall. Since 2012, the country's economic growth rate has declined significantly, directly slowing down from 9.3% in 2011 to 7.7%. Since then, it has declined all the way to 6% in 2019. After the outbreak of the COVID-19 pandemic in 2020, the global economy, including that of China, has entered a state of disorder. Under the intervention of stimulus policies, China's economy maintained a positive growth rate of 2.3% in 2020 and rebounded to 8.1% in 2021 due to the low base effect. By the first three quarters of 2022, the year-on-year growth rate of China's economy was only 3%. So far, the Chinese economy has basically been fixed in 2022. Judging from the current novel coronavirus outbreaks and the measures taken by the Chinese government, researchers at ANBOUND estimate there will be little rebound in the fourth quarter, making it almost impossible for the annual economy to reach 4%. Reaching 3.5% would itself be an achievement, as the matter of fact. If this judgment is correct, this is the biggest gap in China's economic growth in the past decade. From the two-year average growth rate of 5.1% in 2020 and 2021, it slows down sharply to the level of 3%. For a developing country, economic growth below 4% is a dangerously low level.
Another typical manifestation of the bottom-line state is the extreme difficulties faced by the government finances. China's fiscal revenue and expenditure have already seen some challenges to achieving a balance, especially in local finance. From January to September 2022, the national general public budget revenue was RMB 15,315.1 billion, a decrease of 6.6% on a natural basis. Among them, the central general public budget revenue was RMB 6,993.4 billion, a drop of 8.6% on a natural basis. On the other hand, local general public budget revenue during the same period was RMB 8,321.7 billion, a 4.9% decrease on a natural basis. In terms of fiscal expenditures, from January to September, the national general public budget expenditures totaled RMB 19,038.9 billion, an increase of 6.2% over the same period of the previous year. This figure includes the central general public budget expenditure, which was RMB 2,501.4 billion during the same period, an increase of 7% over the same period of the previous year. Local general public budget expenditure was RMB 16,537.5 billion, an increase of 6.1% over the same period of the previous year. National local fiscal revenues and expenditures are in balance, with a deficit of RMB 8,215.8 billion, and it is expected that the annual deficit could reach about RMB 1.1 trillion. From the perspective of financial pressure, it is no exaggeration to say that in 2022, China is facing the most difficult financial situation in the past four decades. There are those who pointed out that the scale of the country's economy is very different from the past, and it has a stronger debt capacity. Indeed, in 2021, China's total economic output was RMB 114.4 trillion (or USD 17.7 trillion, based on the annual average exchange rate). Yet, one should remember that expenditure is on the rise as well, considering that the country is facing the world's largest aging population, the huge expenditure required to support the COVID-19 control measures, and the large gap in social security. Adding all these, it appears that China's financial situation is extremely severe, and in fact, a few local governments have actually experienced "fiscal bankruptcy".
Bottom-line thinking can also be extended to many other areas. At the level of market entities, China is facing the largest wave of corporate closures in more than 40 years. Statistics from Tsinghua University show that in the first half of 2022 alone, 460,000 Chinese companies have closed down. Even the remaining companies have generally adopted the survival strategy of shrinking. Furthermore, China may face more severe employment pressure in 2023. The number of college graduates nationwide in 2023 is expected to reach 11.58 million, a year-on-year increase of 820,000. Coupled with the unemployment problem caused by a large number of business closures, both obvious and hidden unemployment problems will become more severe. At the level of resident consumption, multiple factors such as employment pressure, lower income expectations, and lifestyle changes caused by the pandemic have led to a continued slump in the country’s domestic resident consumption. Under financial pressure, government consumption has also continued to shrink, leading to a round of austere days ahead. Socially, there is a general sense of pessimism about the future national economy and personal economy. In the financial system, the salaries of civil servants are generally reduced, which weakens the enthusiasm of the administrative teams. When the income is getting lesser but the workloads increase while the work resources become scarce, exhaustion and burnout inevitably become commonplace.
Under the bottom-line state, demand in China has also been downgraded to “bottom-line demand”. In this regard, enterprises, families, and individuals in the country will need to make preparations for it.
As it stands, the focus of China’s economy in the future will be on fulfilling everyday necessities, especially food, instead of prosperity, development, and growth as in the past. This drastic change will not only be reflected in the external performance, but also in the evaluation of development standards. Instead of relying on market competition and efficiency as the standards to measure development like in the past market economy, fulfilling these daily necessities will be the yardstick. Such an economy is all about maintenance and does not require complex calculations of economists or blueprints of urban planners. If there is no requirement to compare the standards, the situation would be more manageable.
Under such circumstances, the situation facing the Chinese economy in the future will not be exactly optimistic. The personal opinion of researchers at ANBOUND is that if the situation does not deteriorate in 2023, China's economic growth next year may be in the range of 3.5%-4.5%. However, there are prerequisites for achieving this goal, that is, assuming the impact of the COVID-19 outbreaks will not be as severe as this year, while the policy against the pandemic becomes looser and stabilized, and that China begins to exchange normally with the world. The country’s Central Economic Work Conference will be held next month, being the first such conference after the 20th National Congress. By March 2023, the first national "Two Sessions" after the 20th National Congress will be held as well, and the Chinese government will undergo major changes. The various problems in the Chinese economy mentioned in this article shall be the reality that the new leadership will face.
Final analysis conclusion:
China's economy is yet to be free from the risk of economic slowdown. Hence, economic security remains a crucial issue for the country, both at present and in the future. From the policy level to the market level, it is necessary for the country to deal with what is known as the “bottom-line state” with “bottom-line thinking”, so as to adapt to the economy concentrating on fulfilling survival necessities that will last for a period of time.
