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Driver of Global Growth

作者Author:Ming Zhang 2023-02-07 2023年02月07日
Despite challenges, the upward trend of China's economy will become increasingly more evident as year progresses.

Despite challenges, the upward trend of China's economy will become increasingly more evident as year progresses.

This year, the global economy is expected to undergo the following major changes: The relaxation of COVID-19 response measures by major countries could entail fewer shocks to global growth and the stability of supply chains. The peaking inflation rate in the United States could spur the Federal Reserve to halt its interest rates hikes in the first half of this year. While the continuation of the Russia-Ukraine conflict will buttress bulk commodity prices, the prospect of a global economic slowdown in 2023 will cap the rise in commodity prices. Therefore, we believe that the global economy has entered a new round of stagflation, and some economies such as the eurozone may fall into recession in 2023. In the next two to three years, geopolitical conflicts may pose a key threat to the world.

Against such an international background, there may be some changes in the external environment facing the Chinese economy. External demand will weaken significantly. The growth rate of China's exports could drop significantly with the slowdown in the world's major economies. With the Fed scaling back its interest rate hikes, the dollar index will gradually go down and expectations for the depreciation of the renminbi against the dollar will gradually weaken or even reverse. China will see slower capital outflows over the short term or even capital inflows. Ties between China and the US could pick up. After the G20 summit in Bali, Indonesia, people-to-people exchanges between the two countries are expected to bounce back more quickly.

In the medium-term, China's economy faces external challenges including setbacks to globalization and a higher level of regional integration or the forming of blocs in terms of industrial chains and other fields. Meanwhile, with the Republicans taking control of the House of Representatives, the possibilities for the Democrats to be able to push forward major issues in the US have dropped significantly. The Joe Biden administration may place greater emphasis on its foreign policies. Therefore, China-US relations may face some fresh challenges in the next two years.

China's economy is still facing pressure from demand contraction, supply shocks and weakening expectations. There are some worrisome macroeconomic indicators in the fourth quarter of 2022, including a consecutive negative year-on-year growth rate in retail sales of consumer goods, the sharp drop in growth rate of real estate investment, and negative growth rate in the volume of exports and imports. The profit margin of businesses is being squeezed, and they have shown a lack of willingness for further investment.

China's economy is expected to gradually recover in 2023, but there are a series of challenges facing its recovery.

First, the pandemic has led to a significant slowdown in the growth of residential income and prompted a sharp decline in consumer confidence. Second, high commodity prices and cost of raw materials will squeeze the profit margins of enterprises in the upper and middle parts of industrial chains. Third, there are still hurdles for a significant rebound in real estate investments despite the portfolio of policies, including financing support in credit, bond, and equity for private businesses, rolled out in the sector starting from November, especially given the shifting expectations of developers and home buyers. Fourth, financial risks are still brewing. As China's economic growth continues to be lower than its potential growth rate, it is still necessary to stay alert against financial risks this year. For example, the continued downturn in the real estate sector and the frequent credit defaults by real estate companies may spread to the financial sector. Fifth, an important reason for the drop in the efficiency of economic growth is that various types of private enterprises are currently struggling. Greater policy support to enable the growth of private businesses is an important prerequisite for bolstering the efficiency of China's economic growth.

The focal point of policies right now is to bring the economic growth rate back to its full potential at an early date. Both fiscal policies and monetary policies should be eased, but fiscal policies should play a greater role in harnessing growth. Improving the efficiency of fiscal policy implementation is even more important than the easing measures.

In 2023, the fiscal policy should be further relaxed in terms of total volume. It is important to increase the deficit-to-GDP ratio in the central budget, including steps to bring the ratio back to at least 3 percent in 2023. The issuance of special-purpose bonds for local governments should be scaled up to at least 4 trillion yuan ($590 billion) this year. The scale of government bonds should be expanded, and the policy-backed developmental financial instruments, established with the support of the People's Bank of China, should be carried forward.

Meanwhile, the central government should improve the effectiveness of fiscal policies in the following aspects. First, it is important to improve the financing structure of infrastructure investment. Financing for investment into large-scale infrastructure projects should be provided through the issuance of government bonds. Second, the efficiency of special-purpose bonds for local governments should be bolstered, and the central government should give local authorities greater autonomy in the use of such bonds. Third, a countercyclical model for the oversight of debts borrowed by local platforms should be applied. The management of hidden debts borrowed by platform companies should be appropriately relaxed. Fourth, it is important to strengthen the coordination between fiscal and monetary policies. Fiscal policies should be proactive, and monetary policy should keep domestic interest rates at a low level.

There is still room and necessity for the further loosening of monetary policy. Since the second quarter of 2022, the central bank has carried out several rounds of cuts to the reserve requirement ratio — the proportion of money that lenders must hold as reserves as well as interest rate cuts. There is ample market liquidity and supply of credit funds. The demand for credit is what is truly lacking, which is manifested in the sluggish increase in new credits borrowed by enterprises and households. Therefore, a loose monetary policy should be put in place in 2023, and cutting interest rates is better than lowering the RRR to reduce the costs of enterprises and residents and help stimulate their credit demand.

To sum up, we believe that the growth rate of China's GDP will increase from 3 percent in 2022 to over 5 percent, or even 5.5 percent, in 2023. Considering that the global economic growth rate will drop from 3.2 percent in 2022 to 2.7 percent this year based on the forecast of the International Monetary Fund in October, the Chinese economy will once again become the most important driver of global economic growth in 2023. The global economy will embrace a pattern of a rising East and falling West this year. The upward trend of China's economy will become more obvious in the second half of this year.

Zhang Ming is deputy director of the Institute of Finance and Banking at the Chinese Academy of Social Sciences and deputy director of the National Institution for Finance and Development. Chen Xiao is a doctoral candidate at the Business School at Beijing Normal University. The authors contributed this article to China Watch, a think tank powered by China Daily.

The views do not necessarily reflect those of China Daily.