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ACCEPT Report: GDP Growth Between 4.9 and 5.8 Percent Expected 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.

During the forum, the ACCEPT Macro Forecasting Group shared the “China Macroeconomic Analysis and Forecast Report,” which suggests that the Chinese economy as a whole has shown signs of post-pandemic recovery in 2021, but nevertheless, China's economic growth rate has demonstrated an obvious downward trend. Looking ahead to 2022, the ACCEPT team believes that although the downward pressure on the economy has increased, if the pandemic is properly prevented and controlled and various policies are adjusted in place, China's economy is still expected to maintain a higher growth rate of 5.8%. However, we must also be prepared for the combination of various factors that could result in a decline in economic growth to 4.9%.

In 2021, China's economy as a whole has shown signs of a trend toward post-pandemic recovery, mainly in three aspects. First, the three major industries have all made concerted efforts at a steady recovery compared to 2020, with the value-added of the primary industry growing by 7.4% year-on-year in the first three quarters, the secondary industry by 10.6%, and the tertiary industry by 9.5%. Manufacturing output was able to grow particularly rapidly due to strong exports. Second, consumption showed a significant recovery compared to last year and became the most important driving force of the economic recovery. In the first three quarters of 2021, the cumulative year-on-year contribution of final consumption expenditure to GDP was 6.35%, contributing 64.8% to economic growth, which far exceeded the direct pull effect of investment and net exports on the economy. Third, the economy and society are running smoothly, with consumer prices maintaining a low growth rate and CPI increasing slightly by 0.9% year-on-year on average from January to November. The job market is relatively stable, with 12.07 million new jobs added in urban areas nationwide from January to November, completing the annual task ahead of schedule. Finally, the urban survey unemployment rate was 5.0% in November, lower than the expected annual target of 5.5%. From a global perspective, it has not been easy for China's economy to achieve such results. According to the IMF's latest World Economic Outlook forecast, China's economy was expected to grow at about 8.0% in 2021, far exceeding the average expected growth rates of developed countries and emerging economies (5.2% and 6.4%, respectively). Both developed economies (including the US and the Eurozone) and other emerging market countries (besides China) invariably experienced economic contractions in 2020, yet China was able to achieve positive growth. Nevertheless, maintaining a high economic growth rate in 2021 was not easy.

Despite this notable success, China's economic growth still showed a clear slowdown. China's GDP growth rate in the third quarter was only 4.9%, the same as the real GDP growth rate in the US in the third quarter year-on-year, and much lower than the 18.3% growth rate we started the year with. The main reason for the fall in economic growth has been a decline in investment growth, especially the growth rates of infrastructure investment and real estate investment, which together account for nearly 50% of total fixed-asset investment and have rapidly declined in recent months. The cumulative year-on-year growth rate of infrastructure investment fell from 36.6% at the beginning of the year to 0.5% in November, while the cumulative year-on-year growth rate of real estate investment fell from 38.3% at the beginning of the year to 6.0% in November. This resulted in the growth rate of total fixed-asset investment falling to 5.2% in January-November of 2021. Looking solely at the third quarter, investment contributed -0.03% to GDP, becoming a major drag on the recovery of the real economy. In addition to fixed-asset investment, consumption growth also slowed in the second half of 2021, with the contribution of consumption to economic growth slipping from 9.79% in the first quarter to 3.86% in the third quarter. This slowdown in consumption growth was mainly due to scattered COVID-19 recurrence in several cities in the second half of the year. Even though the employment situation was favorable and the growth rate of real disposable income of urban residents remained high (8.7% in the first three quarters), the normalization of pandemic prevention and control changed people's consumption habits, depressing the demand for service consumption including restaurants, accommodation, and travel, and inhibiting a strong consumption rebound.

Looking ahead to 2022, although the downward pressure on the economy has increased, if the pandemic is properly prevented and controlled and various policies are adjusted in place, China's economy is still expected to maintain a higher growth rate of 5.8%, while it must also be prepared for a combination of factors that could lead to a decline in economic growth down to 4.9%. On the one hand, China's monetary and fiscal policies have relatively ample space to maneuver, and active countercyclical control policies will help the economy stabilize and recover. The short- and long-term interest rate differentials between China and the US remain historically high, which means that even if the US dollar starts the interest rate hike process in 2022, China's monetary policy still has room to respond. As for fiscal policy, the cumulative growth rate of fiscal revenue from January to October this year was as high as 14.5%, and the average growth rate for 2020-2021 reached 4.5%, exceeding the value of the same period in 2019. In addition, as of October this year, the amount of special debt used by local governments was only 81%, while the amount of special debt was almost exhausted in the same period last year. This improvement is mainly due to the Ministry of Finance's efforts to strengthen the management of special debt fund usage and tighten the review and gate-keeping of special debt projects. At the December 6 meeting of the Politburo Standing Committee, the key task of stabilizing growth in 2022 was proposed, so it is expected that the government's fiscal and monetary policies will be more active in 2022, with an annual general fiscal deficit rate of about 3% in addition to more active issuance of special bonds. According to data from the first three quarters of this year, nearly half of new special bonds were invested in urban infrastructure such as transportation and municipalities, while the remaining special bonds were used for social projects in fields such as healthcare and education, subsidized housing, and major infrastructure projects in energy and logistics. Such projects will become an important tool for the government's counter-cyclical regulation and control, strongly supporting the bottoming out and rebound of infrastructure investment. With the support of active fiscal and monetary policies, infrastructure investment and manufacturing investment are expected to stabilize and rebound, with overall fixed-asset investment growth rising to 8% in 2022, exceeding the pre-pandemic level of 5.4% in 2019. In addition to more proactive government support for economic recovery through the expansion of infrastructure investment and government consumption, growth in residents' disposable income will also be a major driver of economic growth. Real disposable income of urban residents grew 8.7% in the first three quarters of this year, while real disposable income of rural residents grew 11.2%, which exceeded the real GDP growth rate (9.7%) in the first three quarters. Rural residents have lower incomes and a higher marginal propensity to consume than urban residents, so this rise in income will help boost consumption and further stabilize the economy. It is worth noting that the profit growth rate of private industrial enterprises has remained high this year, with the profit growth rate of private enterprises reaching 30.5% from January to October. The growth rate of private investment also increased by 8.5% year-on-year, with the private economy absorbing more than 80% of the employment. The stable development of private enterprises is the key to China's economic and social recovery in the wake of the pandemic, and is also the prerequisite for the middle-income group to continuously improve in quality and increase in quantity, facilitating the steady recovery of the consumer market. It is expected that in 2022, under the premise that the private economy is developing steadily, income distribution is optimized, and the pandemic is effectively controlled, China's consumption growth rate will rebound from the average growth rate in 2020-2021, at about 7.0%, acting as a macroeconomic stabilizer.

We also need to beware of multiple factors affecting the economic recovery in 2022, which will likely cause growth to fall to 4.9% if internal and external risks intertwine. First, there is still a high level of uncertainty about the pandemic recovery, as the continuous mutation of the virus has necessitated a tightening of pandemic prevention and control measures. This has deeply affected the work and living habits of residents, depressing their demand for consumption, especially service consumption such as tourism, restaurants, and transportation. In addition, the recovery of overseas economies will lead to some competitive pressure on our export enterprises, which will squeeze the export share and profits of our manufacturers, in turn affecting the employment and income growth of residents. Under a more pessimistic interpretation, it is assumed that the pandemic will permanently change the consumption habits of residents, lowering the growth rate of China's residential consumption by 1.5% in 2022, which will drag down overall economic growth by 0.4 percentage points. Second, there is still a high degree of uncertainty as to whether the risks of real estate companies can be effectively resolved. Currently, under stronger policy constraints, a large number of real estate enterprises have seen their revenues decline. At the same time,  their debts, especially external debts, are expanding, and the elevated repayment pressure has created a greater disincentive for new real estate investment in 2022. Assuming that there is still a shortfall of more than 3% in real estate investment growth in 2022 compared to 2019, GDP growth will be dragged down by close to 0.25 percentage points. Third, the world economy, especially developed countries with better vaccination outlooks, will see relatively strong economic growth in 2022.The U.S. will also begin the process of hiking interest rates, which will squeeze the space for monetary policy regulation in China. More importantly, developed countries and emerging market countries that have achieved better recovery from the pandemic, including India, the Philippines, and Thailand, have continued to regain their production capacity, which will put greater competitive pressure on our exporters. In 2022, it will be difficult for our imports and exports to maintain the strong momentum of 2021, and if our import and export shares in the international market narrow by 10 percentage points simultaneously, it will further drag down economic growth by 0.25 percentage points. Under the combined impact of the above three risks, real GDP growth will fall to 4.9% in 2022. In summary, the group believes that in 2022, China's fixed-asset investment growth will range from 5.0% to 8.0%, retail sales growth will range from 5.5% to 7.0%, and import and export growth will range from 10.0% to 15.0%, while China's macroeconomic growth will range from 4.9% to 5.8%. Whether we can achieve a more optimistic growth rate of 5.8% depends on whether the recurrence of the pandemic can be effectively curbed, real estate risks can be effectively resolved, the vitality of market players can be effectively released, and the assessment method of carbon emissions reduction can accurately understand and grasp the short-term tasks and long-term goals of carbon peaking and carbon neutralization.

ACCEPT Macro Forecasting Group:

David Daokui Li, Li Ke’aobo, Wu Shuyu, Chen Dapeng, Huang Zhangkai, Li Bing, Lu Lin, Guo Meixin, Long Shaobo, Feng Ming, Fu Lin, Xu Xiang, Shi Jinjian, Jin Xingye, Zhang Chi, Zhang He, Lang Kun, Hou Yuntao, Li Lujia, Wang Zihang, Chen Xiang, Li Yaping