Expansionary macro policies still necessary

The outlook for China's economic growth this year is generally positive. Consumption, production and investment have recovered significantly after the optimization of contagion control policies with last year's low base providing room for rapid growth on a comparative basis. Therefore, China's GDP growth is projected to be 5.5 percent this year, with inflation below 3 percent.

However, we should not be overly optimistic given various uncertainties.

First, external uncertainty remains high, especially the possibility of a global economic downturn.

The risk of recession in the United States is relatively low at present, but the odds are high for the eurozone and the United Kingdom to enter a recession or even negative growth in 2023. Monetary tightening adopted to curb inflation is one cause for economic downturn, while the supply-side shock on the global level is another. Shrinking external demand will lead to a decline in China's export growth.

Second, the US Federal Reserve's steep interest rate hikes may continue to escalate global market volatility.

Long before the collapse of Silicon Valley Bank, financial crises have broken out in emerging market economies and developing countries. Affected by the Fed's interest rate hikes, smaller economies such as Lebanon have suffered from capital outflows, currency depreciation, high foreign debt and asset price declines, and their economies have fallen into recession. Recession in some countries is linked to commodity price volatility.

In the short run, the probability that the SVB collapse will trigger a large-scale crisis of small and medium-sized US banks has decreased as the US government decided on a bailout of the bank. But the recent turmoil in the global stock market, especially price declines in the commercial banking sector and turmoil at Credit Suisse, have led to concerns over a reduced risk appetite among global investors, and new financial turmoil and risks in succession. Such risks will hold up northbound capital flows and exert a negative impact on China's financial system and capital market.

Escalated geopolitical conflicts pose another major uncertainty. The Russia-Ukraine conflict that broke out in February last year was unexpected, as is its duration and scope. At present, many macro and financial forecasts are made on the assumption that no new major geopolitical conflicts will break out, but there are relatively large uncertainties in other regions.

The above-mentioned uncertainties will affect China's macroeconomic and financial stability via trade, investment and psychological expectations.

Internally, China's economic growth faces three major uncertainties.

After three years of the COVID-19 pandemic, the "scarring effect" — which refers to the mid- to long-term impact that a major crisis may have on economic growth — should be considered first.

The mid-term impact of the three-year pandemic on China's economy is reflected in at least three aspects.

First, it will affect the risk-taking willingness of Chinese households and enterprises.

Second, the contagion has impacted the balance sheets of enterprises and financial institutions, escalating financial risk in some areas.

Third, the pandemic has seriously affected the income growth rate of low and middle-income families.

In addition, China's total population reached its peak last year, which will also bring about important changes. According to research conducted by Cai Fang at the Chinese Academy of Social Sciences, a negative impact will be increasingly noticeable on the demand side once an economy's total population peaks. Low and middle-income families may face negative shocks more frequently. These have been proven by international experience.

When China's economy confronted downside challenges in the past, policies were mainly adopted on the supply side to protect market entities, but after total population peaks, China's macroeconomic policy should be partly shifted to the demand side to better help low- and middle-income families.

We should understand that relaxed fiscal policy, rather than the market's endogenous growth, is the major reason for China's current economic recovery.

The biggest change in last year's fiscal policy was the 740 billion yuan ($107.71 billion) policy development financial instrument introduced in the second half. Local infrastructure projects can apply for this instrument. Without this, infrastructure investment in the second half of last year would have been impossible.

In addition, the special bonds actually issued last year were much higher than 3.65 trillion yuan. There was still a large amount of value-added taxes left over for tax refunds, which played a very important role in promoting infrastructure investment and stabilizing the market.

If macro policy tightens this year, it may be difficult for China to achieve its 5 percent GDP growth goal. Considering many uncertainties at home and abroad, this year's macro policy should continue to be relaxed and normalization should not be implemented prematurely.

There are a few major aspects to be considered to promote consumption recovery in an all-round way.

Income growth rates of low- and middle-income families should be restored as soon as possible. Treasury bonds, cash or consumer voucher subsidies can be issued to low and middle-income families so that they can better overcome external shocks and uncertainties.

People's confidence should be boosted by any means possible. Reform and opening-up are crucial to that end. Despite the decelerating globalization, China should further advance high-quality opening-up amid deepened internal reform to enhance people's expectations.

Policies should be introduced to promote comprehensive recovery in the services sector.

The recovery of China's services sector at present is now more reflected at the high-level end, such as international tourism, domestic tourism, cinema attendance and entertainment. What really matters, however, is whether small shops that have been closed for a long time can reopen. More government policies, such as tax reductions and exemptions alongside other forms of financial support, could be introduced so that grassroots service companies can recover after three years of heavy losses incurred during the pandemic.

Additionally, the primary distribution of national income should be more inclined toward the residential sector.

International comparisons show the proportion of Chinese residents' income in the primary distribution of national income is still low at present. People are reluctant to consume, partly due to concerns over the sustainability of the future social security and medical insurance systems. In order to address such worries, higher-level government bodies should coordinate social security and medical insurance. Therefore, people's motivation for precautionary savings can be alleviated and their willingness to consume durable goods and discretionary products will be higher.

It should be noted that the expansion of household consumption is also closely related to the direction of future real estate policies. Of course, we should not go backwards, for the Chinese household leverage rate has soared from 18 percent in 2008 to 70 percent in 2019 due to speculation. The policy of "housing is for living, not for speculation "should be assiduously followed. Policy can also be optimized and implemented more smoothly.

Lastly, the recovery of household consumption depends on the healthy development of private enterprises.

Private enterprises provide 80 percent of employment opportunities in China. Large contraction of private enterprises will result in serious problems in the job market, affecting incomes and expectations. Consumption will not be able to recover either. Thus, it is important to better protect the interests of private enterprises and entrepreneurs. More room for development should be opened up for private enterprises so that the job market can thrive, helping people to increase incomes, expand consumption and restore domestic demand.

The writer is deputy director of the Institute of Finance, part of the Chinese Academy of Social Sciences. This article is the transcript of the author's speech at the 62nd Macroeconomic Monthly Data Analysis Meeting (March 2023) of the China Macroeconomic Forum at the Renmin University of China.

The views don't necessarily reflect those of China Daily.