No. 42 | Emerging from the Pandemic: Outlook for 2022


On December 16, 2021, the Academic Center for Chinese Economic Practice and Thinking (ACCEPT) and the Institute for Healthy China at Tsinghua University jointly convened the 42nd Forum of China and the World Economy on the theme of “Emerging from the Pandemic: Outlook for 2022.” Guests and speakers invited to the forum included: David Daokui Li, Director of ACCEPT at Tsinghua University; Liang Wannian, Director of the Institute for Healthy China and Executive Vice Dean of the Vanke School of Public Health at Tsinghua University; Zhao Kejin, Vice Dean of the School of Social Sciences and Deputy Director of the Institute of Global Development at Tsinghua University; Li Zheng, Executive Vice President of the Institute of Climate Change and Sustainable Development at Tsinghua University; Jia Kang, Researcher of the Chinese Academy of Fiscal Sciences and Founding President of the China Academy of New Supply-side Economics; Qin Hong, Senior Researcher of the National Academy of Development and Strategy and Director of the Urban Renewal Research Center at Renmin University of China; Peng Wensheng, Chief Economist of CICC and Executive Director of the CICC Global Institute; Feng Xuming, Director of the Research Office of Macroeconomic Policy, Institute of Quantitative and Technological Economics, Chinese Academy of Social Sciences; and Yuan Gangming, Researcher of ACCEPT at Tsinghua University. Li Ke’aobo, Executive Deputy Director of ACCEPT, delivered the opening remarks.

At the beginning of the forum, ACCEPT researchers Li Bing, Lu Lin, and Guo Meixin released the macroeconomic analysis and forecast report entitled Emerging from the Pandemic: Outlook for 2022. As detailed in the report, China’s economy has shown a trend of post-pandemic recovery in 2021 overall, but downward pressure on the macroeconomic situation has increased since 2H 2021. Investment remains low, which has become the primary factor hindering the further recovery of the real economy. Consumption continues to recover in general, but the structure of recovery remains unbalanced. Worse still, the scattered and frequent resurgence of the COVID-19 pandemic has posed constraints to the progress of recovery. Looking forward to 2022, the report holds that fixed asset investment is likely to improve compared to 2021. If the momentum of recovery is optimal for the manufacturing sector and private investment, the policy environment for investment continues to improve, and the tight supply of coal and electricity—as well as the rising prices of commodities and raw materials—are further alleviated, then investment growth will be able to return to the normal track of growth in 2022, thereby stabilizing the macroeconomic situation. In addition, if the policy of promoting consumption is gradually implemented and the potential of service consumption and optional consumption (such as tourism and automobiles, which were depressed to a greater extent by the pandemic) is further released, then residential consumption will emerge as a stabilizer of economic growth.

ACCEPT’s report forecasts that GDP growth in 2022 will range between 4.9% and 5.8%. The report also puts forth three policy recommendations based on the current circumstances. First, we need to provide incentives for the government to cultivate a national unified market for carbon reduction. Second, we need to take measures to prevent the real estate sector from becoming the trigger for an economic downturn. Third, we need to stimulate the vitality of the private economy and stabilize the confidence of market players.

David Daokui Li, Director of ACCEPT, further elaborated on the views specified in the report. He believes that one major factor leading to the current economic downturn has been issues with the incentive mechanisms of local governments in numerous regions. To stabilize the economy and lay a solid foundation for further growth, government and economics must be reworked. Over the past four decades, a major lesson drawn from China’s economic practice is that the government ought to facilitate the development of the market. As highlighted by David D. Li, government and economics is a new branch of economics jointly founded by ACCEPT and Nobel laureates in economics from around the world. Professor Li believes that government and economics is the academic field most likely to accurately yield new insights from China’s economic development. Studies in the emerging field have been well-received internationally.

According to Liang Wannian, COVID-19 is still regarded as a public health emergency of international concern (PHEIC). Although China has taken rather effective measures of prevention and control against the pandemic, general uncertainties remain. At present, the overall development of the pandemic has been characterized by scattered outbreaks and local aggregation. We need to uphold the overall strategy of guarding against imported cases and preventing a resurgence of the outbreak at home. Concerning the issue of effectively balancing pandemic prevention and control and socio-economic development, Liang Wannian has two major recommendations. First, we should abide by the principle of clearing COVID-19 infections in a timely manner. Clearing infections is not equivalent to maintaining zero infections, but rather continuing to strictly implement the protocol of “early diagnosis, early reporting, early handling, and early treatment.” Second, we need to ensure the precision of pandemic prevention and control from five aspects: namely, by accurately carrying out epidemiological surveys, accurately delineating affected areas, accurately identifying close contacts, accurately providing medical assistance, and accurately balancing socio-economic development with pandemic prevention and control, thereby minimizing the costs of containing the pandemic. Liang Wannian pointed out that it is important to turn challenges into opportunities amid the pandemic and conduct more exchanges between insiders of the public health sector and scholars of the economic circle so as to effectively promote the high-quality development of the economy.

Peng Wensheng explained that the economy faces rather huge uncertainties in 2022 due to the pandemic, especially because certain commonly adopted policies of macro-control are not applicable under the impact of COVID-19. The current economic cycle is distinct from the previous one, which mainly demonstrated fluctuations on the demand side, while now the pandemic has imposed a significant impact on the supply side. Supply shocks are expected to lead to a decline in total economic output and real income, thus transmitting to the demand side. This multiplier effect will have a more significant negative impact on the economy than pure demand-side fluctuations. In addition, China’s economy will face major downward pressure in 2022 from the impact of social distancing on the service sector, the downward adjustment of the financial cycle, and the resolution of the risks and debts of the real estate sector.

In Peng Wensheng’s opinion, the macroeconomic policies specified in the Central Economic Work Conference are targeted at prioritizing stability while seeking progress, and China has taken concerted measures to stabilize growth as the top priority in 2022. However, the economy faces two major difficulties while stabilizing economic growth. First, the pandemic, and second, the challenges facing the real estate sector and related debts. China does not want debt to form a systemic risk, nor does it wish for the real estate sector to experience upward pressure and form bubbles. At present, the economy is facing huge downward pressure and relevant stakeholders are concerned about debt risks. Therefore, related parties including financial institutions, investors, and residents should adopt a cautious attitude toward the real estate industry. However, if all government departments and regions jointly take measures, there is also the possibility of excessive action.

Feng Xuming indicated that the overall outlook for the economy in 2022 is that China will maintain a GDP growth rate between 5% and 6%, with the specific figure depending on the pandemic situation, external demand, and policy support. In 2021, China’s economy has shown strong supply capacity, insufficient effective demand, rising international commodity prices, and differentiation of corporate structures. These features will ease to a certain extent in 2022, while external demand will remain at a high level. The state’s adjustments to fiscal and monetary policy have been favorable to the real economy, and uncertainties such as the US Fed’s monetary policy adjustments will only have a limited impact on China. To guard against shocks from recurrences of the pandemic, he suggested exploring the possibility of establishing special social insurance against the pandemic to subsidize residents and market players in places where outbreaks occur, which will help stabilize the expectations and confidence of market players. Another key point to watch in 2022 will be infrastructure investment, which is subject to the hidden debt risks of local governments. It is recommended to create an investment and financing mechanism more suitable for the current situation, and to establish infrastructure investment banks or funds at the provincial level, distinguishing infrastructure financing and debt from general commercial financing and debt.

Yuan Gangming is most concerned about the likelihood of the GDP growth rate falling below 5% in 2022. In the first three quarters of 2021, the two-year average growth rate has amounted to 4.9%. If GDP growth is calculated on a cumulative basis compared with last year, the GDP growth rate may even be less than 5% in 2022. The underlying factors include the decline of the real estate sector, the rush toward peaking carbon emissions, external impact, a lack of vitality in the market economy, etc. First, the real estate sector accounts for an excessively high proportion of China’s economy. For a long time, many local governments have pinned their growth hopes on real estate. Soaring housing prices have led to rising expectations and panic speculative buying, causing a new round of housing price hikes as well as high debt and high turnover for real estate companies. Once expectations change, the real estate sector will face headwinds. In addition, the pilot property tax has put some pressure on the economy. When Japan introduced the property tax, the bubble burst and the economy contracted. Therefore, Yuan Gangming agrees with Jia Kang in that it is necessary to implement flexible measures so as to slow the further decline of the real estate sector. Second is the issue of improper carbon emissions reduction arrangements, or the rush towards carbon peaking. The pursuit of rapid carbon reduction targets and compression of coal-fired production and thermal power generation have caused a shortage of coal supply and rising coal prices, resulting in a downturn in the overall economy due to power shortages. The uncertainty of whether to reduce carbon, whether to slow down carbon reduction, and how to reduce emissions puts pressure on economic growth. Third, external shocks. The monetary tightening of the U.S. and the return of USD investments have impacted China’s capital outflows. Fourth, as the main body of the market economy, the private economy has experienced declines.

To address the aforementioned issues, Yuan Gangming suggests stimulating the market’s vitality. Recently, there has been an evident shift in policies, and shocks to the private economy have been alleviated. The PMI Index rose fastest for small enterprises and private enterprises in November. Hence, invigorating the private economy constitutes a vital measure for achieving optimal growth in 2022.

Jia Kang believes that the impact of the real estate reform pilot can be divided into short-term impact and mid-to-long-term impact. In the short term, such reforms will clearly lead to the contraction of the real estate market. However, in the mid-to-long term, the genuine resolution of conflicts in the market will depend on the long-term mechanism to fully leverage the role of the real estate sector as a pillar industry and adhere to the policy of houses are for living in, not for speculation.

Regarding the selection of pilot cities for the property tax, Jia Kang holds that both representativeness and urgency of regulation should be taken into account. First, Shenzhen. Shenzhen municipality will build the first demonstration zone of the socialist market economy with Chinese characteristics, and current regulatory policy relies heavily on administrative means such as loan restrictions, purchase restrictions, and price-fixing rather than a long-term mechanism. Second, Hainan. Hainan province plans to build the world’s largest free trade port, so the government should establish a global image of investment facilitation, trade liberalization, and the full flow of factors of production. In addition, we may also consider other regions such as Zhejiang province, which has been named the demonstration area for common prosperity and features both objectivity and necessity in terms of per capita income. Finally, Chengdu municipality is another promising candidate since it is regarded as representative of its region.

At the same time, Jia Kang pointed out that the property tax should include deductions, which should flexibly reflect the conditions of all possible taxpayers as well as deductions for basic family housing security in the reform scheme. On this basis, deductions can be considered based on the number of houses, that is, to move the stock. At present, there is no mature experience to learn from, so pilot projects are needed to generate further insights for national legislation. In calculating the tax base, we should adhere to the market-assessed value so as to give full play to the property tax.

According to Qin Hong, while assessing the development of the real estate sector, we should not merely look at the cumulative data. Otherwise, we are likely to underestimate the current market risks. However, we should also not simply look at the year-over-year data of a single month. Otherwise, we are likely to overestimate the current market risks.

In her opinion, the policy stimulus will not lead to a new round of bubbles in the real estate market in 2022. First, real estate regulations adhere to the general principle of refraining from speculation in the housing industry. At present, the policies are focused on correcting problems rather than reversing the trend. Second, correction efforts are currently limited to financial policies, whereas restrictions on purchases and sales have not been eased. Third, speculative behaviors are becoming increasingly rare in the current real estate market.

With respect to concerns of a hard landing in the real estate sector, Qin Hong provided three suggestions for prevention. First, we should abide by the principle that “houses are for living in, not to for speculation.” Second, we must grasp the opportunities brought by the introduction of new policies. Third, we should adopt real estate policies appropriate for the local circumstances of each place. In 2H 2021, the upstream and downstream of the real estate market both experienced declines due to two factors. First, real estate financial policies tightened too quickly, including the three red lines policy and the centralized quota management of real estate by commercial banks. As a leading enterprise, Evergrande encountered the risk of default, resulting in a credit crisis across the industry. At present, policy correction has been implemented. After a period of adjustment, the market will return to a relatively normal state.

Zhao Kejin shared that China-US trade volume remains at a high level amid the pandemic, and both countries can tap into the huge potential of cooperation between the two markets. The key issue for the government in 2022 is to identify ways of liberalizing the market and creating more opportunities for market players. Currently, the core problem of bilateral relations lies in government behavior.

From the U.S. side, the mid-term elections in 2022 will influence the behavior of the U.S. government through three domestic industrial sectors. First, Wall Street’s focus on China. Second, the rust belt’s significant restraint of China-U.S. tariff reductions. Third, U.S. agriculture’s production dependence and demand dependence on China. The U.S. administration is concerned that China might crowd out the advantages of the U.S., and thus it has held a special summit and taken measures such as cutting off the supply chain to set up a system of risk control targeted at China. Furthermore, the U.S. has even launched the Build Back Better World (B3W) plan. Nevertheless, the trend of introversion incurred by the mid-term election is likely to distract the U.S. from engaging in international affairs and lower the pressure on China in the international community to a certain extent.

From the Chinese side, the country is expected to move towards stability in 2022. The government has shown its determination to ensure the smooth hosting of the Winter Olympic Games and the 20th National Congress of the Communist Party of China, while the signals sent through the Central Economic Work Conference in terms of policy trends have also reflected the priority of achieving stability. In the meantime, as the host of numerous international activities and organizations, China is able to create more opportunities in economic cooperation, climate change, and regional arrangements, which are very beneficial to stabilizing the broader economy. Zhao Kejin also pointed out that under circumstances of overall stability, we can take into account targeted stimulus measures in fields with great potential and remove barriers to the areas suitable for opening up, which is likely to bring benefits in the long run.

During the forum, Li Zheng shared three points on the low-carbon economy. First, the world has reached a consensus to address climate change, and China has firmly set the goals of carbon peaking and carbon neutrality as its direction of development. Therefore, the main task is to identify ways of adapting to this trend so as to facilitate high-quality economic development. Second, to achieve low-carbon growth, we need to promote the green transition of the whole economy and all of society by seizing the opportunities of the green industrial revolution. Third, China has a relatively weak foundation in this area due to reliance on heavy industry with high dependence on coal in its energy structure. As a result, the low-carbon transition will be even more challenging. Therefore, we should grasp an appropriate rhythm for the transition from traditional fossil fuel energies to renewable energies.

Li Zheng believes that China enjoys huge technological advantages in wind and solar as renewable energy sources. Nevertheless, despite the considerable strength of China in carbon reduction technologies overall, there are still numerous areas in need of further progress. During the Glasgow Climate Change Conference, many countries raised stronger demands for addressing climate change. The specific wording of “reducing coal” was mentioned at the conference for the first time, which imposed great constraints on China. In addition, China and the U.S. jointly issued a climate declaration at the conference, revealing the prospects for cooperation between the two countries in this field. By taking climate change and environmental issues as the point of contact and thawing in international relations, both sides are expected to promote the development of comprehensive friendly relations, thus contributing to the recovery of the economy.