Invested Interests

“Stability” was an important keyword during the annual Central Economic Work Conference held in December 2021, which usually sets the tone for the country’s macroeconomic policy for the following year. The conference pointed out that China’s economy faces threefold pressure from shrinking demand, supply shock and weakening market expectations. It prioritized seeking progress while maintaining stability for 2022. In Li’s government work report, stability was mentioned 76 times. 　

The world economy is still struggling. China is shifting to a green, innovation-driven growth model. All this means that the 5.5 percent goal is not a simple task. Experts are pinning a lot of hope on investment. 　

This lowered GDP target for 2022 does not come as a surprise. In 2021 the GDP growth rate was 8.1 percent, far beyond expectations, but it slowed quarter by quarter, down from Q1’s 18.3 percent to 4.9 percent and 4 percent in Q3 and Q4. Regionally, six provinces failed to achieve their GDP growth targets for 2021. In most provinces, two-year average growth was lower than before the Covid-19 outbreak, Caixin reported in February, which shows that regional economies are still recovering. 

Li Daokui, director of the Institute for Chinese Economic Practice and Thinking at Tsinghua University in Beijing, predicted that China’s economy in 2022 had the potential to grow at 5.8 percent, though it could slide to 4.9 percent. Most economists and market analysts believe GDP will grow 5-5.5 percent. 　

The goal reflects the ceiling of market expectations, which will help bolster market confidence, and the floor of China’s potential economic growth, which ranges between 5.5 and 6 percent, said Liu Yuanchun, economist and vice president of the Renmin University of China in Beijing. Besides, China aims to create at least 11 million jobs in 2022. “A 1-percent bump in GDP brings about 1.8 million to 2.2 million jobs, so we truly need a 5.5 percent increase to create enough jobs,” Liu said. 　

In addition, the 5.5 percent target is in line with China’s goal of becoming a medium-level developed country with per capita GDP of more than US$40,000 by 2035. Analysts believe it will require average growth to be around 4.8 percent over the next decade and 5.3 percent average growth during the 14th Five-Year Plan (2021-2025). 　

Yao Yang, director of the National School of Development at Peking University told NewsChina that China has entered a new economic cycle. “If the outside environment does not deteriorate sharply, domestic policies do not fluctuate violently like in the latter half of 2021 and the pandemic is controlled, the economic cycle could last for five to seven years and then move to a period of steady growth.” 　

But ensuring the Chinese economy to continue growing is difficult, as the nation is facing multiple challenges both at home and abroad. Liu Yuanchun told NewsChina that the goal of 5.5 percent growth is achievable, but against the backdrop of international turbulence, global economic stagnation and China’s complex economic transition, the process will be arduous. 

Consumption looked good in 2021, contributing to 65.4 percent of China’s economic growth and becoming the primary driving force among the three factors. But Xiang Dong, deputy director of the State Council Research Office, said consumption in 2021 was simply a recovery from the low in 2020. Two-year average growth in consumption remains lower than before the pandemic. In particular, services are sluggish, with revenue from tourism, accommodation and movie theaters lower than in 2019. Yao Yang said stimulating consumption this year remains a problem. Now as the coronavirus rebounds in many places, consumption, particularly services, may not climb back until after May or June when the pandemic is more under control and prevention strategies are adjusted. Investment is expected to become the most important force driving the Chinese economy in 2022, according to this year’s government work report and policies implemented early this year. Li Daokui said the drop in China’s economic growth in the latter half of 2021 was mainly caused by a decline in investment growth, particularly investment in infrastructure and real estate. In November 2021, investment in the two sectors dropped by over 30 percent compared to early 2021. 　

Investment’s contribution to GDP was -0.03 percent in Q3 2021, dragging the recovery of the real economy. Since the end of 2021, the government has been exploring ways to increase investment. 　

Zhang Liqun, researcher with the Department of Macroeconomic Research, Development Center of the State Council, told NewsChina that when the government expands investment, enterprise orders and sales will increase remarkably, corporate investment and recruitment will become active again and stimulate employment and household income, and then the economy will enter a positive cycle. “Therefore, it is important to let the government play a leading role in investment. It is essential for China to solve the problem of shrinking demand,” Zhang said. 　

This year’s government work report pointed out that China will “use government investment funds to stimulate and expand effective investment” and will “give full play to the leveraging role of major projects and government investment and refine relevant supporting policies to keep non-government investors fully motivated.” The work report said China will “begin construction on major projects that are ready for launching, new types of infrastructure, and renovations of outdated public facilities.” 　

The acceleration of infrastructure investment is already showing in specific policies and market sectors. In 2021, issuing special local government bonds (for the construction of particular projects) was slower than expected, with even savings by year’s end. In December 2021, the Ministry of Finance allocated 1.46 trillion yuan (US$229.5b) in special bonds ahead of its 2022 scheduled quota, signaling acceleration in the issuance and use of special bonds. By January, one-third of the quota was issued for transportation, municipal and industrial parks, low-income housing projects and more. 　

Liu Yuanchun said that one reason behind the tardiness of special bonds in 2021 was the lack of projects. But now, as the 14th Five-Year Plan (2021-2025) is implemented, there are numerous infrastructure projects. Besides, local governments, in the wake of the two sessions, are more active in infrastructure. The challenge now is redundant construction, excess capacity and creating sustainable investment, Liu said. 

Some places are short of both capital and projects, said Liu Shijin, deputy director of the economic committee of the National Committee of the Chinese People’s Political Consultative Conference, according to a conducted survey. As heavy debt burdens local governments, particularly hidden debt, they are not active in financing, including issuing special bonds. Liu Yuanchun said that many local governments are unwilling or incapable to invest in infrastructure. 　

China’s fiscal deficit ratio (deficit-to-GDP ratio) for 2022 is set at 2.8 percent, lower than the previous two years, to maintain fiscal sustainability. This year, tax rebates and cuts will reach 2.5 trillion yuan (US$393b), over 10 percent of the government’s total revenue, a big expenditure for local governments, Yao Yang said. 　

But this will not make the financial situation worse for local governments, Liu said, explaining that even though the deficit-to-GDP ratio is lowered by 0.4 percent compared to 2021, the total deficit scale will increase as GDP expands. Besides, as Zhang Liqun pointed out, State-owned financial institutions and specialized institutions will turn over their balance of profit in recent years to budgetary funds, making it possible to expand fiscal expenditure by at least 2 trillion yuan (US$314b) in 2022. The added expenditure will be allocated to bail out enterprises and stabilize employment to stimulate consumption and demand, Zhang said. 　

Meanwhile, transfer payments from the central to local governments will increase by 18 percent over the previous year, the biggest rise in years, for a grand total of 9.8 trillion yuan (US$1.5t). This capital will also go to the grassroots level to help ensure people’s wellbeing, wages and the normal operation of governments. 　

The work report said that special bonds for local governments will reach 3.65 trillion yuan (US$573.8b) to aid government investment, the same level as last year. Direct investment from the central government will reach 640 billion yuan (US$100.6b), 30 billion yuan (US$4.7b) over 2021. “The increase in government investment in infrastructure is clear,” Zhang said. 

　

The real estate market, an important source of fiscal revenue, has shown signs of recovery. Since January, new real estate regulation policies have emerged in many places to stabilize the housing market and send signals of loosening regulation. Credit policies are relaxing too. Some banks in Guangzhou, Guangdong Province, and Suzhou and Nanjing in Jiangsu Province have reduced mortgage rates. 　

But Yao Yang said that familiar tools such as infrastructure or real estate do not offer a way out. He has more faith in alternative paths tested in other countries, like directly giving subsidies to low-income groups to stimulate consumption. 　

While there is a consensus that consumption could change the situation of oversupply and insufficiency in demand, Liu and Zhang agree that consumption is slow to make change, as the promotion of consumption depends on many factors. 　

Liu pointed out that promoting consumption must correctly target the right groups for better marginal utility, and giving subsidies will involve concerns about fairness. Besides, local governments have no internal incentive to stimulate consumption, as investing in infrastructure will help improve local government officials’ performances and increase tax income, which cannot be achieved with consumption. Also, promoting consumption requires the government to put in real money, while with infrastructure the government only needs to plan projects and invest in startup capital, which can leverage private capital. 　

Investment has been a useful tool in China’s macro-economy regulation. This year, it still prefers to use government investment to attract private capital and boost economic development. But the results remain to be seen.