Recovery boosters

Song Chen/China Daily

China should step up efforts to spur consumption, invigorate market entities and foster new growth drivers

The Chinese economy expanded by 2.5 percent in the first half of 2022 and 0.4 percent in the second quarter, registering positive growth amid downward pressure, according to data from the National Bureau of Statistics. China's economic recovery will likely gather pace in the second half with better containment of the novel coronavirus and policy stimulus measures further taking effect. That said, the recovery is confronted with new challenges, compared with 2020 when the sudden onslaught of the COVID-19 pandemic dealt a heavy blow to the economy.

To start with, insufficient demand has become a major problem since the start of 2020. Recovery in demand lagging behind that of production has become a basic feature of the Chinese economy. The sluggish recovery in consumer demand has become all the more evident since the start of this year. In the first half of 2022, China's retail sales of consumption goods dropped by 0.7 percent year-on-year, reflecting slower growth in per capita consumption expenditure. Moreover, a sharp rebound in investment in the manufacturing sector has now slowed because of rising energy and labor costs. Insufficient consumption demand is constraining China's economic recovery.

The COVID-19 pandemic has also changed the behavior of smaller businesses. As the pandemic has dragged on for more than two years, some households and smaller businesses have used up their savings. Companies tend to make short-term decisions, reducing their investment risks, and consumers are getting more cautious about how they spend money.

The structure of the recovery momentum has also changed. The Chinese economy shrank by 6.8 percent in the first three months of 2020 because of the pandemic, but recovered quickly to register a 3.2 percent year-on-year growth in the second quarter. Apart from strong policy support, such a speedy recovery was the result of the booming digital economy, a prosperous property market and a steep rebound of exports when China took the lead in controlling the virus. Now, the country is facing a slowdown in the platform economy, prolonged sluggish growth in the property market and shrinking space for export expansion. China is in dire need of cultivating new growth drivers and reinforcing the momentum of recovery.

China also faces a more complex and austere external environment with rising inflation becoming a global trend. The US consumer price index increased 9.1 percent from a year ago in June, a new 40-year high. To tame the rapid and persistent inflation, central banks from the world's major economies, such as the US Federal Reserve, have quickened the pace of interest rate hikes and are winding down their massive balance sheet, resulting in a fast increase in debt pressure and notably raising the risk of stagflation and economic recession. A slowdown in global economic growth will lead to a contraction in international market demand, squeezing the space for an expansion of China's exports, and undercutting China's economic and financial stability with greater capital flow and exchange rate volatility.

China's economic growth has been slowing since 2010, mainly caused by a drop in the potential growth rate on the supply side. This constitutes what we call "the new normal" in China's economic development. Now, changes to the supply side are continuing while the demand side is also changing. The focus of pro-growth policies should be steered toward greater efforts in boosting domestic demand, invigorating market entities, and fostering new growth drivers.

The intrinsic momentum for sustained growth should be strengthened. Expanding effective investment is still the key to accelerating economic recovery. China needs to bring into full play the pivotal role of investment and continue to support investment in infrastructure projects related to transportation and water conservancy, to address weak links essential for people's livelihoods. China also needs to ramp up efforts to spur consumption by implementing short-term stimulus policies, such as reducing the purchase tax for some passenger vehicles, supporting the consumption of new energy vehicles and construction of electric vehicle charging piles, and providing subsidies for trading-in old home appliances for new ones.

To unleash its huge consumption potential, China should speed up reform of its hukou (household registration) system, achieve full coverage of basic public services at an accelerated pace, and move faster in granting permanent urban residency to people moving from rural areas to cities. Research findings show that the per capita consumption expenditure of people moving from rural areas to cities will increase by around 30 percent when they are granted permanent urban residency.

One of the most important tasks at the moment is to unveil reform measures that can boost market confidence. Affected by internal and external factors, China's platform economy has been losing steam since the second half of 2021. Special rectification campaigns of the platform economy should be turned into regular supervision. Clear-cut, positive signals should be sent out to encourage sound development of the platform economy. Green lights as well as red lights should be put in place to give market entities clear expectations. In the meantime, businesses from the platform economy should be encouraged to take part in the nation's major scientific and technological innovation projects to make the most of their role in accelerating breakthroughs, so as to advance China's industrial technological progress.

More strenuous efforts should be made to foster new economic growth drivers. China's digital transformation is covering more areas, expanding from consumption to manufacturing, and an industrial ecosystem based on the industrial internet is taking shape at a faster pace. It is time to fully unleash the structural growth momentum arising from industrial transformation and upgrading. Also, China's installed capacity of renewable energy has exceeded 1 billion kilowatts. In the first half of 2022, production of new energy vehicles and solar cells increased by 111.2 percent and 31.8 percent, respectively. Given the robust growth of the new energy, new opportunities lie in the nation's green transformation.

The author is vice-chairman of the China Center for International Economic Exchanges. The author contributed this article to China Watch, a think tank powered by China Daily. The views do not necessarily reflect those of China Daily.

Contact the editor at editor@chinawatch.cn