China as a main engine of global growth

By Wang Dan

Despite headwinds in demand from home and abroad, China remains the main engine of global growth. According to IMF's latest report, emerging markets show a positive economic growth projection compared with advanced economies. The report forecasts China's GDP to grow by 5.2 percent in 2023, higher than the official target of 5 percent. A natural rebound in services and consumption is the primary source of China's growth in the first half of 2023.

China's total goods imports and exports expanded 2.1 percent year on year in yuan terms in the first half of 2023. In terms of products, the production of solar cells, new-energy automobiles and industrial control computers and systems were up by 54.5 percent, 35 percent and 34.1 percent respectively. We expect the trend of green product export to remain resilient.

China's retail sales of consumer goods maintained a relatively fast growth of 8.2 percent year on year in the first half year, 2.4 percentage points higher than that of the first quarter. During the first six months of this year, there are significant structural shifts: NEV sales resumed their high pace, increasing by 44 percent year-on-year sales growth to account for 28 percent of total automotive sales, while traditional ICE (Internal Combustion Engine) car sales increased by only 0.4 percent.

China's industrial upgrade aiming to reach its climate change goals will fuel a transformation in its industrial structure, which in turn lay the foundation for its transition towards an innovation-based economy.

Policy options amid numerous headwinds

The economic outlook for the developed world is in sharp contrast to China. Although the labor market continues to outperform in the U.S. and Europe, inflation pressure remains. The federal reserve and the European Central Bank (ECB) maintained a contractionary stance in their monetary policies to combat inflation but also choked growth. China's export to both regions has therefore declined significantly.

According to IMF, global inflation is projected to decline from 8.7 percent last year to 6.8 percent this year, a 0.2 percentage point downward revision, and 5.2 percent in 2024. China's economy faces a completely different challenge by having exceptionally low inflation. The country's subdued inflation is the primary factor behind the IMF's 0.2 percentage point downward revision of its 2023 global inflation prediction. The figure also leaves room for further monetary policy easing, although the authority has so far taken a precautionary approach. China's export prices are declining as manufacturers rush to lower prices to clear their inventory, which acts as a cushion for the high consumer inflation in the rich world.

Aware of all the challenges, the Political Bureau of the Communist Party of China (CPC) Central Committee recently held a meeting to analyze the current economic situation and make arrangements for economic work in the second half of the year. The stock market reacted positively to the stimulus signal, and the market is waiting for the follow-up policy measures.

In addition, China will further open the market to attract foreign investments. It is now much easier to set up a business in China than most places in Europe. The legal environment and macro policies are both pro-business. The protection of intellectual property right has drastically improved in recent years.

Envisioning long-term growth

After hitting a historical low of 49 percent in 2011, the consumption proportion of GDP once began to rise and reached 56 percent in 2019. However, the trend was disrupted by the COVID-19 pandemic, and the share fell to 53 percent in 2022.

Ordinary people are much more cautious with their expenditures, and bank deposits surged to new highs. The IMF suggests that increased policy support in China, particularly through transfers to households, may help to promote positive worldwide spillovers. This also implies a much more rapid decline in the share of income retained by other sectors, mainly local governments. Such sizable income transfers from local governments to ordinary households would be politically difficult to manage.

What's more important, the social safety net needs to be enhanced to help restore consumer confidence. In 2022, just around 7 percent of the jobless received unemployment benefits, suggesting inadequate safeguards.

In the long term, despite uncertainties, the Chinese economy remains resilient, as China has the capacity and drive to meet challenges. To promote long-term prosperity, China's policymakers choose to prioritize structural reforms through innovation and green transition, rather than short-term stimulus.

Yet we shall not mistake short-term fluctuation for long-term growth. Noises rise when the business cycle is entering a downturn, but signals also emerge for transformative change. Looking back at recent history, the right conclusion to draw is not that China's economy has lost momentum. It is that China is changing gears in its growth drivers.

Wang Dan, a special commentator on current affairs for CGTN, is the chief economist of Hang Seng Bank China.