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Macroscope | How China’s economy can dodge rising inflation to reclaim high growth
- Beijing will have to be very targeted in expanding fiscal and monetary policy to boost investment, especially in infrastructure, while ensuring price stability
- But ultimately, policy expansion cannot fix the economy’s structural problems; it can only buy space for reforms
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Last March, the Chinese government set a growth target of 5-5.5 per cent for gross domestic product for 2022. At the time, such growth levels appeared perfectly attainable. But within a month, the Omicron variant had arrived, triggering strict lockdowns that, while stemming the spread of the coronavirus, caused serious damage to the supply and demand sides of the economy. China’s growth rate for 2022 was just 3 per cent.
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But things are looking up for China’s economy. After the government’s rapid shift away from its zero-Covid policy last December – and especially since the middle of last month – the economy has sprung back to life.
This renewed vitality was on display during the Spring Festival holiday in late January, with more than 300 million trips taken, up 23 per cent from last year.
There are good reasons to expect significantly higher growth in 2023. For starters, the headline rate will reflect the low base in 2022. Given the 4.8 per cent average GDP growth in 2019-22, a back-of-the-envelope calculation suggests China should be able to achieve GDP growth of around 6 per cent in 2023.
Moreover, China still has ample room for expansionary monetary and fiscal policy. In the monetary realm, there is space to lower both the reserve requirement for banks and policy interest rates, such as the seven-day reverse repo rate and the medium-term lending facility.
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As for fiscal policy, there are widespread – and legitimate – concerns about China’s high leverage ratio. But the government’s debt-to-GDP ratio remains significantly lower than in most advanced economies. Add to that China’s faster GDP growth and high savings rate, and it is clear China’s fiscal position is much stronger than in most developed countries.
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