Developing or reforming the Chinese economy?
Author: Jiao Wang, University of Melbourne
China’s economy had another extraordinary year in 2021, experiencing strong growth despite the global COVID-19 pandemic. But sustaining this growth in 2022 will require some balancing, likely at the expense of much-needed reforms.
China’s two-year average growth was 5% and 5.5% in the respective first two quarters of 2021, excluding the weak base of 2020. Growth slowed slightly in the second half, with 4, 9% in the third and fourth quarters. percent in the fourth quarter year-on-year. Overall, this better-than-most-expected GDP performance was driven by booming demand as part of the global rebound from the COVID-induced economic downturn.
The trade sector also performed well in 2021 – total exports increased by 29.9% year-on-year, reaching their highest level since 2011. Strong export growth was supported by a well-developed COVID situation. nationally managed that allowed factories to reopen and workers to return. China’s trade has also benefited from the strong recovery of several advanced economies, including the United States. Exports to the US market increased by 27.5% in 2020 and imports increased by 33.1% despite numerous tariffs still in place.
The Chinese government has also made significant progress in regulating the market in several sectors, including steel, education, real estate and the internet. Regulatory repression in the real estate sector is particularly harsh and aims to contain the excessive expansion of debt and financial risks. In particular, the new “three red lines” policy forced most real estate developers to deleverage over the next few years. China’s regulation of the Internet sector mainly focuses on antitrust and unfair competition. Several internet giants, including Tencent, Alibaba and Meituan, have been hit with colossal fines for monopolistic behavior and anti-competitive activities.
One of the highlights of the year is China’s plan to rigorously advance pilot programs in input markets – including land, labor and capital markets – to shift to allocations. more market-based by 2025. Trial programs include a plan to reform the household registration system. This system has long been an obstacle to migrant workers’ access to social benefits in urban areas. The experimental plan is a step towards labor mobility, greater urbanization and the reduction of urban-rural inequalities.
From December 8 to 10, 2021, the Central Conference on Economic Work was held in Beijing. The central task for 2022, according to the briefing notes, is to stabilize the Chinese economy and society. This implies that the Chinese government will more rigorously encourage growth instead of reform in 2022, since growth often comes at the expense of reform, and vice versa. The urgent need for growth stems from the triple threat to the Chinese economy: declining demand, supply shocks and weakening expectations for future growth. Beijing also needed steady growth for a smooth opening of the 20th Party Congress in March.
The threat of a contraction in demand is due to the weakening of both external and domestic demand. As the boom in demand for goods after the 2020 pandemic disruption has faded, many advanced economies have moved into a more sustainable recovery phase with less appetite for trade. Domestically, consumption has remained weak since 2020. In addition, China faces supply shocks, including the continued impact of COVID and rising raw material prices and production costs. The weakening of future growth expectations is largely due to China’s hostile external environment and elevated uncertainty around its future domestic economic environment.
To achieve its stabilization target, the Chinese government is expected to adopt an active fiscal policy with an accommodative monetary policy in the first half of 2022. Fiscal policies include lower taxes, especially for small and micro enterprises as well as manufacturing industry , an increase in public spending , and infrastructure investment ahead of schedule.
While the policy ingredients to promote growth and stability are the right ones, their effective implementation remains a challenge. Cutting taxes and increasing government spending when growth slows means a bigger budget deficit for the central government, but Beijing is cautious about increasing that deficit. In the meantime, financing infrastructure investments will remain a difficult task for local governments. Local officials are forced to pay attention to the risk of indebtedness, and the return on investment in infrastructure has not been particularly strong.
Meanwhile, China continues to handle local COVID outbreaks with an iron fist while most advanced economies rely on vaccination and live with COVID. Cities like Xi’an were grounded when the initial search for contracts failed in December 2021.
China’s fight against COVID reveals two things: first, its political structure is strong enough to ensure that strict measures such as lockdowns are implemented effectively from top to bottom, and most of the Chinese people are cooperative enough. to comply. Second, the Chinese social security system has significant weaknesses. Migrant workers and small business owners have no social safety net to fall back on when affected by the closures, nor can authorities easily dispatch relief workers and rescue them.
Looking ahead, 2022 will be another year of balancing growth and reform. It is likely that growth and stabilization will be achieved at the cost of a temporary pause in reforms. China’s zero COVID policy, while appropriate for now, remains a challenge for continued growth.
There is still room for a more active fiscal policy, but high local government indebtedness remains a concern and the efficiency of infrastructure investment needs to be significantly improved. Finally, China’s weak social security system is a flaw in the Communist Party’s harmonious society. Market reform programs, and in particular the pilot reform of the household registration system, are a good start to address this problem.
Jiao Wang is a research fellow at the Melbourne Institute of Applied Economic & Social Research at the University of Melbourne.
This article is part of a series of EAF special features on 2021 in review and the year ahead.