Author: Jiao Wang, University of Melbourne
China’s economy had another extraordinary year in 2021, experiencing strong growth despite the worldwide COVID-19 pandemic. But sustaining that growth in 2022 will require some balancing, likely at the expense of much-needed reforms.
China’s average two-year growth was 5 per cent and 5.5 per cent in the first two respective quarters of 2021, discounting the low base from 2020. Growth slowed a bit in the second half of the year, with 4.9 per cent in Q3 and 4 per cent in Q4 year on year. Overall, this better-than-most-expected GDP performance was driven by booming demand as part of the global rebound from the economic downturn caused by COVID.
The trade sector also did well in 2021 — total exports rose 29.9 per cent from a year earlier, hitting their highest level since 2011. The strong growth of exports was underpinned by a domestically well-managed COVID situation that allowed factories to re-open and workers to return. China’s trade also benefited from the strong recoveries of several advanced economies including the United States. Exports to the US market increased by 27.5 per cent over 2020, and imports grew by 33.1 per cent despite the many tariffs still in place.
The Chinese government also made significant progress in market regulation in several sectors, including steel, education, real estate, and the internet. The regulatory crackdown in the property sector is particularly tough, and aimed to contain the over-expansion of debt and financial risks. In particular, the new “three red lines” policy forced most property developers to deleverage over the next few years. China’s regulation of the internet sector mainly focusses on anti-trust and unfair competition. Several internet giants including Tencent, Alibaba and Meituan were hammered with huge fines for monopolistic behaviours and anti-competitive activities.
One highlight of the year is China’s plan to rigorously push forward pilot programs in production factor markets — including land, labour and capital markets — in order to move towards more market-based allocations by 2025. Among the trial programs is a plan for reforming the household registration system. This system has long been an obstacle to ensuring migrant workers are able to access social benefits in urban areas. The experimental plan is a step towards labour mobility, further urbanisation, and narrowing urban–rural inequality.
From 8–10 December 2021, the Central Economic Work Conference was held in Beijing. The central task for 2022, according to the summary notes, is stabilising China’s economy and society. This implies the Chinese government will more rigorously promote growth instead of reform in 2022, given that pushing growth often comes at the expense of reform, and vice versa. The urgent need for growth arises from the triple threats faced by the Chinese economy — shrinking demand, supply shocks and weakening expectations of future growth. Beijing also needed steady growth for a smooth opening of the 20th Party Congress in March.
The threat of shrinking demand is due to the weakening of both external and domestic demand. As the burst of demand for goods after the 2020 pandemic disruption faded, many advanced economies transitioned to a more sustainable recovery phase with a smaller appetite for trade. Domestically, consumption has remained low since 2020. In addition, China faces supply shocks including the continuing impact of COVID and rising commodity prices and production costs. Weakening expectations of future growth are largely due to China’s hostile external environment and elevated uncertainty around its future economic environment at home.
To achieve its goal of stabilisation, the Chinese government is set to adopt active fiscal policy with accommodative monetary policy in the first half of 2022. Fiscal policies include tax reduction, especially for small and micro businesses as well as the manufacturing industry, more government spending, and ahead-of-schedule infrastructure investment.
While the policy ingredients to promote growth and stability are the right ones, effectively implementing them remains a challenge. Reducing taxation and increasing government spending when growth is slowing means a larger budget deficit for the central government, but Beijing is cautious about raising this deficit. In the meantime, financing infrastructure investment will remain a tough task for local governments. Local officials are pressured to watch out for debt risk, and the return on infrastructure investment has not been especially large.
Meanwhile China continues to manage local outbreaks of COVID with an iron fist while most advanced economies rely on vaccination and living with COVID. Cities such as Xi’an went into lockdown when initial contract tracing failed in December 2021.
China’s fight against COVID reveals two things — first, its political structure is sturdy enough to ensure that stringent measures such as lockdowns are implemented effectively from the top down, and most of the Chinese population is cooperative enough to comply. Second, there are significant weaknesses in China’s social security system. Migrant workers and small business owners do not have a social safety net to fall back on when they are affected by lockdowns, and authorities cannot easily send relief and rescue them either.
Looking ahead, 2022 will be another year of balancing growth and reform. It is likely that growth and stabilisation will be achieved at the expense of a temporary pause on reform. China’s zero-COVID policy, while appropriate for the time being, remains a challenge to continued growth.
There is still room for more active fiscal policy, but elevated local government debt remains a concern and the efficiency of infrastructure investment needs significant improvement. Finally, China’s weak social security system is a flaw in the Communist Party’s harmonious society. Programs of market reform, and in particular pilot reform of the household registration system, are a good start to addressing this.
Jiao Wang is a Research Fellow at the Melbourne Institute of Applied Economic & Social Research at the University of Melbourne.
This article is part of an EAF special feature series on 2021 in review and the year ahead.
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