China’s economic performance has been inspiring considerable pessimism lately. In the second quarter of this year, the Chinese economy grew by just 6.3 per cent from a year earlier – a
figure that is disappointing because of the low base in the second quarter of 2022, when pandemic restrictions were still suppressing economic activity. And
in July, China’s consumer price index (CPI) entered negative territory for the first time since 2021, sparking fears of a deflationary spiral.
Whether all the pessimism is warranted ultimately depends on the answer to one crucial question: does the recent decline in China’s GDP growth rate reflect fundamental changes to economic conditions – such as
population ageing, diminishing returns to scale, the deterioration of the latecomer advantage, and rising environmental costs – or can it be addressed with more effective macroeconomic policies?
In fact, while there is little doubt that the era of sustained double-digit growth is over, China is well-positioned to achieve a significantly higher growth rate than most developed economies in the foreseeable future. After all,
China’s per capita gross domestic product is still less than a quarter of that of the United States.
The key to success lies in policy: while staying the course of reform and opening up, China must use fiscal and monetary levers to respond to growth and price data. Should both growth and inflation be sluggish, fiscal and monetary expansion are in order. Conversely, if inflation rises sharply, a tightening should follow, even if it results in lower growth.
For now, barring
black swan events, a surge in inflation appears unlikely. China’s CPI has been hovering around 2 per cent since May 2012, and its producer price index (PPI) has been negative for the better part of the past decade. PPI fell into negative territory in March 2012, remaining there for 54 months. It was then negative for 16 of the next 17 months, beginning in June 2019. It remains in negative territory now, having been so since last October.
Meanwhile, China’s GDP growth rate has been on a consistent decline, falling from 12.2 per cent in the first quarter of 2010 to 6 per cent in the fourth quarter of 2019. From 2020 to 2022, China’s average annual growth rate was about 4.6 per cent. Amid this combination of weakening growth and low (or even negative) inflation, the case for growth-boosting fiscal and monetary expansion is strong.
