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Expansionary policies key to 2022 growth

By Yu Yongding | China Daily | Updated: 2022-02-21 09:45
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We should first of all have a clear and accurate understanding of China's 8.1 percent GDP growth rate in 2021. The seemingly rapid growth rate last year should be compared to the pre-COVID readings in 2019.Excluding the low-base impact brought by COVID-19, China's GDP growth rate in 2021 would be adjusted to below 5 percent.

In a nutshell, China's actual economic growth rate is lower than the potential GDP. Although potential GDP is impossible to calculate as it is just theory, we can still come to the above conclusion by looking at current production utilization rates, prices and employment.

China's inflation rate has remained low for quite some time, with even deflation reported at times. The producer price index has stayed in negative territory for 54 months since March 2012. The average consumer price index for the past decade was lower than 2 percent. The two indexes only moved up quickly in the second half of last year. But the latest data show that the CPI has remained low while the PPI has begun to fall back. All these indicate further room for economic growth for China.

The emphasis on development quality is unquestionably correct. But if economic growth remains stagnant, it will be extremely difficult to achieve goals like structural reform, technology innovation and common prosperity. High-quality development will be empty talk if growth rates cannot be secured.

Methodologies are misused when academia discusses the high growth rate. It is believed by some that China's structural problems have hindered high growth rates. But how does one define a "high growth rate"? The 12.2 percent GDP growth rate in 2010 was undoubtedly high, but the 5.5 percent target set for 2022 cannot be defined as "too high".

Meanwhile, there is no clear definition for "structural problems". All issues outside macroeconomic factors are included in the basket of "structural problems", such as an aging population, a relatively less developed capital market and imbalances in regional economic development. "Structural problems" are now used to explain economic growth for a specific year or quarter.

Such logic of explaining a specific result utilizing an abstract cause is completely wrong, as "structural "elements should be used to explain long-term economic trends. The so-called structural elements are usually slow-acting and long-lasting variables. They will impact the country's economy for many decades to come but the impact on one specific year or quarter will be very limited.

The "structural elements" list is so long that each single element's impact on the economy can be considered minor. They can even sometimes cancel out one another's negative impact. The cause-and-effect chain of one structural element can be so long that it is difficult to tell precisely which exact element is influencing the economy in the short run.

Let's talk about consumption. In early 2020, it was believed by many scholars that consumption would be boosted if government subsidies were provided. But no rebound was reported when Wuhan, Hubei province, ended its lockdown in April 2020, deflating the above hypothesis. According to economic theories, consumption is decided by actual income and future income expectations. If the economic growth rate does not pick up, people's incomes will not increase accordingly. People's expectations will not improve and it will thus be difficult to stimulate consumption.

Then it comes to the question of setting the right growth target. A target centered around "stabilizing economic growth" raised by the central government has come just in time. Under the current context, such a target implies preempting further declines in economic growth.

But potential GDP is extremely difficult to calculate. An open mind should be adopted to utilize the most effective solutions to facilitate economic growth. Economics is not an exact science with empirical solutions or answers. It is art to some extent. Given the huge complexity of China and the world as well as the uncertainty of economic growth, we should be more flexible to correct and implement economic policies in a timely manner.

Economic growth targets should be based on past experience, as well as trial and error. China's GDP growth rate began to slow down on a quarterly basis since 2010, coming in at 6 percent in 2019. Such contractions should be ended.

Long-term economic slowdowns will result in growth rates being increasingly more difficult to rejuvenate if they've remained stagnant for too long.

China's inflation rate is quite low. Although overall leveraging rates are relatively high, the entire financial system is still healthy. There is still much room for China to adopt progressive policies and thus, a higher economic growth target is feasible.

Therefore, the Chinese government should set a clear economic growth target for 2022. By making it instructive rather than compulsory, specific policies can thus be drafted and implemented.

By keeping infrastructure investment increases at certain levels, China will be able to realize long-term economic growth. As most of China's infrastructure investment can be controlled by the government, specific targets can be set by taking into account real-time consumption and investment data. Increased infrastructure investment can boost investment in manufacturing, which can translate into buoyed consumption demand.

Financing problems should be addressed to facilitate infrastructure investment. Past experience shows that government bonds, rather than local government financing platforms, should serve as the major financing channels for infrastructure investment.

Property investment plays a special role in China's economic growth, accounting for the biggest share of the GDP among all the world's major economies. The increase in China's housing prices is also one of the fastest in the world.

Resource allocation is the major problem in the Chinese property market. Many high-end properties are unoccupied while housing demand among mid to low-income groups remains unmet. Therefore, property sector curbs should be implemented at the right time to avoid market fluctuations amid sudden changes.

The economic growth rate is not only about the economy but also about geopolitics. The US economic growth rate is climbing while China's is declining. India's GDP growth rate has overtaken China for two consecutive years. Such matters should not be overlooked.

This year, the United States will exit its extremely loose monetary policy, which has been adopted for 12 years, due to rising inflation. The renminbi will see depreciation pressure and the independence of China's monetary policies will be affected. But the external environment is unlikely to undergo drastic changes and China's macroeconomic policies will not be significantly affected.

Many industry insiders set China's GDP growth rate target this year at 5.5 percent and I share the same prediction. China should make its fiscal policy more expansionary in 2022, while its monetary policy should also be more progressive this year. The coordination between fiscal and monetary policies should be strengthened.

The writer is former president of the China Society of World Economics and director of the Institute of World Economics and Politics at the Chinese Academy of Social Sciences.

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

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