Policy Recommendations on Reaching the Growth Target for 2022
China’s economy got off to a steady start in the first quarter of 2022 that saw GDP rise 4.8% year-on-year. But the sporadic COVID-19 outbreaks in multiple locations nationwide since March have stagnated local production and daily life to a varying extent. COVID-19 is amplifying its economic impact. Resource price hikes and weakening growth momentum worldwide，incurred by the Russia-Ukraine conflict，have compounded a downward pressure on China’s economic growth. Given that China’s annual “Two Sessions” (refers to the annual meetings of China’s top legislature，the National People's Congress (NPC)，and its top political advisory body，the National Committee of the Chinese People’s Political Consultative Conference (CPPCC)) took place before the two unexpected incidents，i.e. the outbreaks and the conflict，their economic and social impact was not taken into account in China’s 2022 economic and social development goals set at the “Two Sessions.” This situation calls for an accurate assessment of the impact from two unexpected incidents to give policy suggestions that ensure China’s economic operation within a proper range.
Shrinking demand. There is a clear shrink of resident consumption. In March，the total retail sales of social consumer goods had a year-on-year decrease of 3.5%，and that in Q1 had a year-on-year increase of 3.3%. This indicates further weakening compared with the two-year compound annual growth rate of 4.0% during 2020-2021. Homebuying demand remained weak. The cycle of “weak sales - difficulty in payment collection- lukewarm response to land bidding - deceleration of new construction - falling real estate investment” has not yet been broken. Export growth decelerated notably in physical terms，only about 3.8% in Q1，which was much lower than the average annual growth rate of about 13.3% in 2020-2021. And the net export of goods and services contributed 0.2% to GDP growth，which was apparently lower than the 1.2% growth in 2020-2021. The downward trend of global economic growth brought about a cooling overseas demand. Headwinds against industrial and supply chains results in the shift of exports and industries from China to other regions，which will bring new pressure on China.
Supply shocks. While the shortage of silicon chip，coal and electricity hasn’t been alleviated effectively，COVID-19 has impeded the industrial and supply chains，with local disruptions in the flow of people and logistics. The Russia-Ukraine conflict further exacerbates the upstream cost impact on downstream industries，with material prices staying high year-on-year but consumer goods prices remaining low，hence making it harder for small，medium and micro-enterprises and individual businesses to operate. With the gradual recovery of the industrial and supply chains in countries，their reliance on Chinese production dwindles. The Russia-Ukraine conflict further intensifies the trend of reverse globalization and economic security concerns. Bottlenecks in China’s key components and key technologies tend to be grim.
Weakening expectations. Since 2020，when the Chinese economy is still in recovery with the COVID-19 outbreak impact，a range of policies were put in place to curb disorderly expansion of capital and reduce electricity use in factories via power rationing，including regulatory policies on real estate，anti-monopoly in the platform economy，Internet finance，data security，the “double reduction” policy (a decrease in the amount of time school children spend doing homework and extra tutoring，and the financial burden on parents of paying for after-school training centers and private tuition) in the education sector，among other fields. The policies，both in number and intensity，are unprecedented. Individually，these policies are completely right; but when stacked together，they produce the “fallacy of composition” and “division fallacy” effect to economic growth，along with a volatile market expectation. The Central Economic Working Conference in late 2021 proposed to play the positive role of capital，but also to set up a “traffic-light” mechanism – referring to areas of encouragement，bans and restrictions – to enhance supervision of capital and prevent excessive growth. Platform economy regulation is a worldwide issue，which requires high requirements on policies and supervision departments. It is difficult to finish the job in one go. Market entities and government agencies are two sides of the game. Amid a wait-and-see atmosphere，market expectations are difficult to improve soon. Moreover，the Russia-Ukraine conflict and the recurrent COVID-19 waves aggravate the concerns of market entities.
Given the Russia-Ukraine conflict，monetary policy adjustments in the United States and other countries，the world economic slowdown，rising inflation，and based on the latest IMF World Economic Outlook in April，it is expected that the impacts from the factors above would slow down the Chinese economy by about 0.2 percentage point. There are notable challenges to keep economic growth，employment and prices within reasonable ranges.
During 2020-2021，China had a two-year average annual economic growth of 5.1%. Excluding the negative impact caused by power rationing and the “fallacy of composition” and “division fallacy” policy effect，the actual economic growth rate should be between 5.3% and 5.5%. Although there is still a shortfall from the growth potential of 5.5%-6%，it evidences the huge success of China’s overall COVID-19 prevention and control as well as its economic and social development. Under the new wave of COVID-19 and the Russia-Ukraine conflict，we have been following the requirements of the CPC Politburo meeting in late April 2022，develop unshakeable confidence，intensify macroeconomic policy adjustments，i