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In the first half of 2022, China’s GDP growth rate was 2.5% year-on-year, of which the year-on-year GDP growth rate in the second quarter was only 0.4%. From the single-month data, the year-on-year growth rate of retail sales of social consumer goods in June 2022 was 3.1%, much higher than the -11.1% in April; the year-on-year growth rate of exports in June 2022 was 17.9%, much higher than 3.9% in April. At the same time, domestic inflation has picked up. In June 2022, the year-on-year CPI growth rate rose to 2.5%.
On the one hand, as the measures of the domestic economic market stabilization meeting in late May gradually took effect, the domestic economy has shown signs of bottoming out and rebounding. On the other hand, in the context of high global inflation, domestic inflation has also risen. Against this background, there is a view in China that in order to prevent China’s economy from overheating in the second half of 2022, macroeconomic policies should avoid further easing.
The author does not agree with the above point of view. In fact, China’s current economic growth rate is still significantly lower than the potential output growth rate, that is, there is a significant negative output gap. The core task at present is to continue to ease fiscal and monetary policies to help China’s economic growth return to its potential growth rate as soon as possible. Even if the resulting inflation rate rises significantly, the easing of macro policy should not change. The author’s main reasons are as follows:
First, the external environment facing China is still severe and complex. High domestic inflation in the United States has forced the Federal Reserve to accelerate interest rate hikes and shrink its balance sheet. In just five months, the Fed has raised interest rates by 225 basis points, and is expected to raise interest rates by 75-125 basis points in the second half of the year. The rapid contraction of the Fed’s monetary policy not only increases the possibility of the US economy entering a recession in the future, but also may drag the global economy into a new round of recession. In addition, global financial conditions have tightened significantly, which has led to financial turmoil in some emerging market countries. What cannot be ignored is that the recent global geopolitical situation is particularly tense, and uncertainty is likely to rise further. If the global economy gradually enters recession, this means that the external demand facing China’s exports will drop significantly. Tighter global financial conditions and rising uncertainty might also lead to short-term capital outflows and pressure on China to depreciate its currency. For example, in July 2022, China’s manufacturing new export orders index fell to 47.40 from 49.50 in June, and the deterioration of this index is cause for concern.
Second, the domestic economic recovery is not yet solid. From the perspective of consumption, the year-on-year growth rate of social consumption in June is still significantly lower than the average level of regarding 8% before the epidemic, and the epidemic has recently shown a trend of spreading in many places in China. Both the growth rate of urban residents’ disposable income and the consumer confidence index are currently at a low level. This determines that the consumption trend in the second half of 2022 may remain weak. From the perspective of investment, the cumulative year-on-year growth rate of fixed asset investment from March 2022 has not changed month by month, and the growth rate of real estate investment is particularly worrying. In July 2022, China’s manufacturing purchasing managers index dropped from 50.2 in June to 49.0, falling below the line of prosperity and decline once more. This means that the growth rate of manufacturing investment in the future is not optimistic. From the perspective of exports, the growth rate of exports in May and June 2022 is indeed dazzling, but a considerable part of this is caused by the centralized shipment of backlogged goods following the unsealing of Shanghai Port. Whether it can continue remains to be seen.
Third, several potential economic and financial risks are still fermenting. First, unemployment among young people remains high. From April to June 2022, the surveyed unemployment rate for young people aged 16-24 hit a new high for three consecutive months, reaching 19.3% in June. From a social perspective, the employment problem of new graduates this year has not been fundamentally resolved. Second, the systemic risks of the real estate industry have not been lifted. Despite the successive introduction of several policies to support the housing market, the pessimistic expectations of both real estate developers and buyers on the real estate market have not been reversed, and both investment and sales are very sluggish. News that some large developers may default on their debts has been heard, and the situation of small and medium-sized developers is worse than that of large developers. The local governments are under great pressure to guarantee the delivery of buildings, and the risk of collectively cutting off the supply of houses still exists. Third, the risk of local government debt should not be underestimated. Especially for local governments in some central and western provinces, under the background of huge government debts that need to be repaid, the pressure to ensure wages and operation is already great, and the funds to ensure development are even more stretched. Many local government platforms have encountered financing difficulties, making it difficult to continue to ensure the advancement of infrastructure investment.
Fourth, the current domestic inflationary pressure is still controllable. On the one hand, although the year-on-year CPI growth rate in June 2022 rose to 2.5%, the year-on-year growth rate of the core CPI during the same period was still only 1.0%. On the other hand, as of June 2022, the year-on-year growth rate of PPI has fallen for 8 consecutive months, from 13.5% in October 2021 to 6.1%. The scissors gap between the year-on-year growth rate of CPI and PPI has narrowed significantly, which means that the kinetic energy of inflation pressure passing from PPI to CPI will decrease. It is undeniable that pork prices have recovered rapidly recently, and the year-on-year growth rate has rebounded from -46.9% in September 2021 to -6.0% in June 2022. However, it may take regarding 1-2 quarters before the year-on-year growth rate of pork prices turns from negative to positive and starts to significantly drive the year-on-year growth rate of CPI. In other words, we still have a 1-2 quarter window to achieve further monetary policy easing. It must be noted that expansionary policies should be adhered to even if inflation may worsen in the future. At present, increasing economic growth and avoiding recession are the top priorities, and we cannot use austerity to curb inflation.
In July 2022, the IMF lowered its forecast for China’s economic growth in 2022 to 3.3%, and predicted China’s economic growth rate in 2023 to be 4.6%. It can be seen from this forecast that the IMF believes that the current and future growth rate of China’s economy will still be lower than the potential growth rate. The Politburo meeting of the Central Committee held on July 28, 2022 pointed out that it is necessary to consolidate the trend of economic recovery, focus on stabilizing employment and prices, keep the economy operating within a reasonable range, and strive to achieve the best results. The meeting emphasized that macro-policy should take an active role in expanding demand. In the field of fiscal policy, make good use of local government special bond funds, and support local governments to make full use of the special debt limit. In the area of monetary policy, it is necessary to maintain reasonable and sufficient liquidity, increase credit support for enterprises, and make good use of new credit from policy banks (800 billion yuan) and infrastructure construction investment funds (300 billion yuan).
The author believes that in order to better stabilize the economic market and eliminate the output gap, in addition to the above-mentioned policies, macroeconomic policies may still need to be loosened. In terms of fiscal policy, in order to better stimulate consumption recovery, the central government may consider issuing a special treasury bond to provide cash subsidies or consumer vouchers to low- and middle-income households, as well as to provide financial discounts on loans to small and medium-sized enterprises. In terms of monetary policy, in order to reduce the issuance costs of special bonds and corporate financing costs, further reductions in MLF and LPR interest rates can be considered in the third quarter.
Some people worry that once morest the backdrop of the Fed raising interest rates and shrinking its balance sheet, China’s further loosening of monetary policy may lead to depreciation pressure on the exchange rate of the RMB once morest the US dollar. But in fact, the exchange rate trend not only depends on the changes in the interest rate spread between China and the United States, but also depends on the difference in the economic growth prospects of China and the United States. It should be said that in the second half of 2022, changes in economic growth prospects are more favorable for China. The US economy is already showing signs of weakness, while the Chinese economy has bottomed out. What’s more, even in terms of interest rate spreads, the yield on the 10-year U.S. Treasury bond has dropped from a high of 3.5% recently to around 2.7% as the growth outlook has turned bleak, and the China-U.S. interest rate spread has turned negative to positive once more. In other words, in the medium and long term, to maintain the stability of the RMB exchange rate, the most important thing is to maintain the fundamentals of sustained and rapid growth of the Chinese economy.
Note: This article only represents the author’s personal views. The author is the deputy director of the Institute of Finance and Banking of the Chinese Academy of Social Sciences and the deputy director of the National Finance and Development Laboratory.This article is edited by Xu Jinjin.xu@ftchinese.com