No. 43 | An Analysis of the Economic Situation in the Second Half of 2022

On June 14, 2022, the Academic Center for Chinese Economic Practice and Thinking (ACCEPT) at Tsinghua University held the 43rd Tsinghua University Forum of China and the World Economy. The forum was held online, with the theme of “An Analysis of the Economic Situation in the Second Half of 2022.” Guests in attendance included Zhang Ming, Deputy Director of the Institute of Finance & Banking at the Chinese Academy of Social Sciences; Qin Hong, Senior Researcher at the Institute of National Development and Strategic Studies and Director of the Urban Renewal Research Center at Renmin University of China; Li Dawei, Researcher at the Institute of Foreign Economic Research of the China Macroeconomic Research Institute; Chen Yudong, President of Bosch Group China; Shen Jianguang, Chief Economist of Jingdong Group; David Daokui Li, Director of ACCEPT; and Yuan Gangming, Researcher at ACCEPT. Li Ke'aobo, Executive Director of ACCEPT, hosted the meeting.

At the forum, Tsinghua ACCEPT released a report entitled “Outlook for China's Economic Development in the Second Half of 2022.” Researchers Li Bing and Guo Meixin systematically introduced the impact of the domestic and international situation on China's economic trends under the overlapping influence of the pandemic and changes unseen in a century.

In recent months, there have been multiple domestic outbreaks of COVID-19, which have hit the industrial chain and supply chain. Investment, consumption, and foreign trade are also under downward pressure and face multiple challenges. In terms of investment, the year-on-year growth rate has fallen. Infrastructure investment has been affected by the pandemic in many places; the slowdown in fiscal revenue growth and other negative factors have dragged down the growth rate. Commodity prices are running high, manufacturing investment momentum has weakened, and the willingness and ability to invest have decreased. The growth rate of real estate investment has turned negative, and land acquisition has demonstrated continued weakness. In terms of consumption, the growth rate of residential consumption has declined sharply since March this year due to the large impact on consumption activities such as going out for shopping and dining. Behind this weak consumption are a high urban unemployment rate and a significant decline in the growth rate of residents' income. In particular, young groups have found it significantly more difficult to gain employment. In the face of decreasing labor force employment opportunities, residents' uncertainty about the future economy and employment has risen, bringing about an increase in residents' preventive savings, making current consumption decrease and leading to insufficient consumption motivation. In terms of prices, driven by rising food and energy prices, CPI rose over 2% year-on-year in May, while PPI growth fell compared to January-April, but still remained high. Foreign trade, foreign exchange, and import and export growth have slowed down since this year. Trade volatility has increased, stabilizing foreign trade pressure. At the same time, due to weakening market expectations resulting in increased capital account outflows, coupled with the uncertainty of the future trade situation, the balance of payments is under greater pressure, meaning we cannot rule out the possibility of further depreciation of the RMB. In terms of debt leverage, the overall risk of China's debt is manageable under the downward pressure of the economy, influenced by the rebound in leverage of the non-financial corporate sector and the rise in leverage of local governments. In the first quarter of this year, China's macro leverage ratio rebounded for the first time since it was reduced in consecutive quarters from September 2020 to the end of 2021.

International risks can be mainly divided into two parts. First, the global pandemic and simultaneous food crisis, energy crisis, and debt crisis caused by the Russia-Ukraine conflict. The international food supply chain has been disrupted, and the prices of various types of food products have risen sharply, impacting the food security of low- and middle-income countries. Furthermore, Russia is under sanctions from Europe and the United States, and the prices of crude oil and natural gas have soared. With the arrival of the peak season of demand for refined oil products, which has a significant impact on China's energy security, uncertainty in the international capital market has increased. After the Fed's interest rate hike, global interest rates went up and the cost of debt servicing rose in developing countries. This was especially true for low-income countries, where the interest rate on treasury bonds peaked at 8.4% in the first four months, accompanied by serious external debt payment difficulties, exacerbating the risk of capital flight and debt distress in developing countries. The second category of international risk is the uncertainty of US economic growth. In the first quarter of this year, the US GDP fell 1.51%, the first negative growth since the second quarter of 2020. The US economy is now showing signs of economic overheating, with simultaneous high inflation and low unemployment rates. The US inflation rate exceeded 4% for 13 consecutive months, with annual overall inflation rising to 8.6% in May. US bond long- and short-term yields inverted in April, and stock indices such as the Nasdaq and S&P 500 have been trending downward from the end of March and posted the largest one-month decline since the 2008 financial crisis in April. As the Fed sets a lower long-term inflation target (2%), tightening policies such as interest rate hikes must be vigorously pursued to reduce inflation, which will push up unemployment and force the economy into recession. Continued interest rate hikes are inevitable and the risk of a “hard landing” has increased.

ACCEPT’s Executive Director Li Ke’aobo distilled the domestic and foreign factors detailed in the comprehensive macro report into ten policy recommendations to stabilize current economic growth: 1) stabilize consumption and release consumption potential; 2) promote key industries and enterprises to stabilize and absorb employment and promote the development of the vocational skills training market; 3) smooth the infrastructure financing mechanism and increase the intensity of investment in new infrastructure and new energy; 4) curb housing speculation and stabilize the real estate market; 5) stabilize the stock market to inject confidence into China's economic development; 6) stabilize the supply chain and food supply to ensure the safety of economic operations; 7) boost the confidence of Internet platform companies; 8) increase investment in education to enhance the total human resources and strengthen the long-term development potential of China's economy; 9) improve government and economics and accelerate the construction of a large national unified market; 10) strengthen international exchanges and communication, and proactively respond to international challenges.

Next, ACCEPT’s Director David Daokui Li summarized the report. He emphasized that China's economy is currently facing numerous challenges and should take comprehensive measures to actively respond. Among the many problems currently faced, short-term challenges are manifested in the decline in consumption growth, rising unemployment, and the impact of the Russia-Ukraine conflict. In response to the short-term risks, effective policy responses should be adopted. In the medium- to long-term, the first recommendation is to protect investors' incentives. A healthy market economy is a community of interests in which government departments, investors, and workers must be incentive-compatible, so it is important to coordinate the enthusiasm of all parties, especially to protect the development of private enterprises. The second recommendation is to mobilize the enthusiasm of local governments. ACCEPT is committed to research in government and economics, and one of the most important tenets of this field is that government is an extremely important player in the modern market economy. Therefore, a set of mechanisms must be established to stimulate the government to cultivate and regulate the development of the market economy, which will guide the role of the government and the role of the market to work in the same direction. Professor Li said that through comprehensive measures, economic growth is expected to stabilize in a reasonable range in the second half of the year, and China's economy will still unleash its huge growth potential.

After the release of the macroeconomic report, the conference entered into the roundtable guest speakers’ session. Zhang Ming predicted that this year, China's economic growth will show a more obvious V-shaped pattern, with positive GDP growth in the second quarter. The economy will need to generate more power in the second half of the year, and the annual growth rate may be 3-4%. Three conditions need to be met to reach this level: macro policy relaxation, tight regulatory policy adjustment, and overall control of the COVID-19 pandemic. In April, a lot of financial data demonstrated a precipitous decline, but the current supply of China's financial market is abundant. The key lies in boosting the confidence of residents and enterprises, requiring fiscal, monetary, and regulatory policies to work together in order to stimulate the credit demand of micro subjects. Considering factors such as pig prices starting to rebound and the rise in global commodity prices due to the Russia-Ukraine conflict, China's monetary policy should seize the precious window of time when the current dollar index and exchange rate stabilize and decisively adopt an accommodative monetary policy before prices substantially climb.

Qin Hong pointed out that curbing housing speculation is a top-level concern of China's real estate development, requiring the entire housing sector to return to residential uses. Through the implementation of a series of controls over the years, such as restrictions on purchases, sales, loans, prices, relocation, and business, the main body of demand in the current real estate market has essentially shifted to those seeking to purchase a first home or to change homes. Due to the overall shrinkage of the real estate market, not only is there very little investment demand, but the demand for home ownership has also been delayed for those seeking to purchase a new home or change homes. Now some cities have begun to adjust and optimize the strict control policies of the past, which can stabilize the overall situation of the real estate market and indirectly stabilize the development of the macroeconomy. The future trend of housing prices will have different features according to various factors such as regional industry and population. Regarding renting and buying, Qin Hong suggested adopting a ladder of consumption: first small then big, first old then new, first rent then buy. The central government is vigorously developing guaranteed rental housing in 40 key cities, so residents may want to rent first and buy later. As long as the country is developing, the size of the middle class will expand, and the number of young people buying houses will not be reduced.

Chen Yudong explained that since Shanghai began reopening in June, all sectors have begun actively resuming work and production. Although full production has not yet returned, the supply chain has basically achieved normal operations and closed-loop work is not required. Looking at the data, although the automotive industry still experienced negative growth in May, there was a great recovery compared to April. In the second half of the year, if the pandemic eases, the suppressed demand will be released. Coupled with stimulation from various national policies and the release of license plates, it is believed that the automotive industry will achieve positive growth. On the other hand, the tight supply of chips in the first half of the year has restricted the production of many mainstream models, including new energy vehicles. The satisfaction rate of chips will be greatly improved in the second half of the year, which, together with the full resumption of work and production by enterprises in the supply chain, will further promote the growth of the auto industry. In response to rumors of foreign companies moving out of China, Chen Yudong said that Bosch's products are mainly for the Chinese market, and production is mainly carried out in China. Thus, the company would not consider moving out of China, but some multinational companies do have this consideration. To cope with this situation, China needs to expand its communication with the world and make corresponding policy adjustments. For small- and medium-sized enterprises, tax adjustments are very favorable, and for large multinational enterprises, stable confidence is most important.

Li Dawei shared that this year's export trend first declined and then rose. He posited that the export situation in the second half of the year will be more positive because China’s exports have “all-round” competitiveness. That is, when the Western demand structure changes, China can find new export growth points. For example, last year, products related to the “home economy” became the main force of export growth. Then, in April-May this year, with the resumption of cross-border tourism outside China, the export of travel products has become a new growth point. Export growth is expected to stabilize at about 10% in the second half of the year. At the same time, the impact of the Russia-Ukraine conflict on China's food and energy security has been mainly on the price side, not on the supply side. In other words, the Russia-Ukraine conflict will not lead to a shortage of food and energy supply in China. To deal with this situation, China needs to improve domestic food production, ensure the diversification of food and energy imports, increase the proportion of renewable energy, and maintain food and energy security through comprehensive measures. On the US side, the Biden administration has been focusing on strengthening cooperation with ASEAN under the Indo-Pacific Economic Framework for Prosperity (IPEF) since he took office. The most important goal of such actions is to build a flexible supply chain and try to “decouple” from China. It should be noted that since this “decoupling” as emphasized by the Biden administration is mainly focused on chips, new energy, rare earths, and other fields that have obvious advantages compared to ASEAN, “decoupling” will not have a significant impact on the industrial chain.

Shen Jianguang commented that the core of attention to consumption is to focus on income changes. The pandemic has had a greater impact on the income of those who cannot work online, and the change in income has had a greater impact on optional consumer goods. Compared with 2020, the impact of the pandemic on consumption has been more pronounced this year. The short-term income fluctuations at the beginning of the pandemic had little impact on consumption, which rebounded quickly. Now that the pandemic has lasted two years, income and economic expectations for most people have become permanent, and the downward pressure on consumption is greater. The pandemic has had a greater impact on the income of people in jobs that cannot be done online, and income changes have had the greatest impact on optional consumer goods like home appliances, electronics, and jewelry. These areas should be subsidized for consumption by certain groups for certain products. The previous consumption vouchers were very effective but the volume was too small, so the widespread distribution of universal consumption vouchers would have an immediate effect on consumption. China's consumer demand is relatively weak compared to production, so it is very important to stimulate domestic demand. The US food stamp program and the HKD 5,000 per person e-consumer voucher program in Hong Kong have also been very successful. The short-term stimulus effect of consumer vouchers is fast and obvious, and there is a multiplier effect, which is better than the effect of cash. The main difficulty with consumption vouchers is that local governments have limited finances, and the number of vouchers issued is also limited, so central-level policy must be activated.

Yuan Gangming observed that in the first three months of this year, China's economy was in a warming phase, but in April the impact of the pandemic caused it to fall back again. It is worth noting that in the case of pandemic impact alone, online retail sales and other indicators of growth should have increased faster, but the growth rate from January-April this year was only 5.2% year-on-year. Thus, it can be argued that the reason for the economic downturn is not only the shock from the pandemic, but rather that the monetary policy has not been appropriate enough. Monetary policy cannot only focus on the main goal of controlling inflation, which contradicts economic growth. In general, the Chinese economy is still in a period of development, and the main goal is to maintain the necessary growth rate or an even higher growth rate. Furthermore, Yuan Gangming argued that China's fiscal policy is also currently constrained by the serious problem of local fiscal gaps. The solution is twofold: firstly, to increase the transfer of central finance to local finance; secondly, to adjust and innovate institutionally. Financing platforms, despite accusations, may not be a bad way to supplement financial capacity. At the macro level, it is necessary to avoid a downturn in the economy caused by keeping the leverage ratio too low.