China’s Current Macroeconomic Situation and Policies
The Politburo of the Communist Party of China (CPC) Central Committee held a meeting on July 24 this year analyzed the current economic situation and outlined economic tasks for the second half of the year. It was acknowledged at the meeting that since the beginning of 2023，China’s economy has been recovering steadily and returning to normality overall. Moreover，high-quality development has been well carried out，industrial upgrading has yielded good results，food and energy security has been effectively safeguarded，and social stability has been maintained. This has laid a solid foundation for the achievement of China’s economic and social development goals this year. Meanwhile，the difficulties and challenges that China’s economy currently faces were also recognized at the meeting. These include insufficient domestic demand，operational difficulties for some enterprises，numerous risks and uncertainties in key areas，and a complicated and stern external environment. It was stressed at the meeting that achieving economic goals for the second half of the year requires further efforts to comprehensively advance reform and opening-up，intensify macroeconomic policy regulation，focus on expanding domestic demand，boost confidence and mitigate risks，and accomplish sustained growth. There must also be an ongoing enhancement of self-sustaining economic drivers，continuous improvement in social expectations and mitigation of hidden risks. Efforts should be made to effectively help achieve reasonable growth and enhance the quality of China’s economy.
There are many positive comments and highlights on the meeting，which gives people more confidence and expectations for China’s economy. So，how should we view China’s current economic situation? Given the current economic challenges，what measures can be taken to mitigate these difficulties and overcome these challenges? In an exclusive interview to China Forex，Mr. YIN Yanlin，Vice Chairman of the Economic Committee of the Chinese People’s Political Consultative Conference (CPPCC)，shared his views with Dr. GAO Zhanjun，the Executive Editor-in-Chief of China Forex，on relevant issues.
Discussion 1
China's current economic situation
GAO Zhanjun: The meeting held by the Politburo of the CPC Central Committee on July 24，2023 had a keen understanding of the current economic situation. What’s your take on China’s economy overall?
YIN Yanlin: Since the beginning of 2023，China’s economy has been recovering steadily and is by and large returning to normality. China’s gross domestic product (GDP) grew 5.5% year on year in the first half of 2023 (4.5% in the first quarter and 6.3% in the second)，data from the National Bureau of Statistics of China (NBS) showed. This was significantly higher than the 3% growth rate for the whole of last year and the 4.5% growth rate in the first quarter of this year. As indicated at the Politburo meeting，China’s economy has also confronted with a series of challenges and difficulties，including insufficient domestic demand，operational difficulties for some enterprises，numerous risks and uncertainties in key areas，and a complicated and stern external environment. How should we evaluate China’s economy? A couple of days ago，while reading the Global Times on a plane，I came across an editorial reprinted from China’s Hong Kong-based South China Morning Post. The title was interesting. The article said that China’s economic growth can be seen as a glass that’s half full rather than one that is half empty. Critics may see the glass as half empty，pointing to unfavorable future factors and suggesting that these figures only prove that the era of rapid growth is over. On the contrary，optimists hold a view that progress can be achieved by focusing on high-quality growth with a heavy emphasis on advanced technology and high-value-added industries. This approach is more significant than the growth-at-all-costs that was prevalent in the past. I tend to agree more with the optimistic perspective. To sum up，there are four points: high-quality development has made solid progress，industrial upgrading has yielded substantial results，food and energy security has been effectively safeguarded，and social stability has been maintained.
Discussion 2
China’s economy still faces many difficulties and challenges
GAO Zhanjun: The latest economic data released by the NBS of China on August 15，2023 shows that in the first seven months of this year，fixed-asset investment increased by 3.4% year-on-year. The year-on-year growth rates of consumption and industrial added value in July fell to 2.5% and 3.7% respectively，both lower than the market’s general expectations. Financial data released by the People’s Bank of China (PBOC) on August 11，2023 also indicate considerable weakness in areas such as social financing and credit. This signifies that China’s economy still faces many difficulties and challenges. From your perspective，what are the main issues that need to be addressed?
YIN Yanlin: Even though China’s economy is confronting new difficulties and challenges，it has great resilience and potential for development，and its long-term positive fundamentals have not changed.
Firstly，the external environment has indeed become more complicated and stern. Currently，the global geopolitical and security landscape is undergoing profound adjustment. Great power conflict has intensified and the Ukraine crisis still faces a deadlock. And food and energy security issues are still prominent challenges. Growth in the global economy remains weak. Major international institutions generally predict that global economic and trade growth this year will be lower than that of last year and restrictive financial policies in major developed economies will have a spillover effect in foreign investment and international trade sectors. In particular，as the US and other western countries push for a “de-sinicization” of supply chains，China’s foreign trade and investment growth continue to face significant headwinds. Industrial upgrading，coupled with changing international supply chains，is having an impact. The risk of experiencing "double squeezing" for labor- and technology-intensive exports is becoming increasingly apparent，and this poses a serious concern. Furthermore，there is a possibility that China's leading position in seven labor-intensive exports could be overtaken by other countries such as Vietnam and Mexico，which is a significant issue. These challenges encompass both labor-intensive and technology-intensive industries.
Moreover，youth unemployment is a major issue. China’s central government and the State Council have placed a strong emphasis on youth employment this year and have optimized measures to reduce unemployment. But the youth unemployment rate in June was a record high of 21.3% and it’s expected to further increase in July and August due to seasonal factors. The reasons are multifaceted. These include a record high labor supply，weaker market demand and structural issues. These factors have led to a weakened job market，reduced the capacity of the high-tech industry to recruit new workers，and resulted in fewer new jobs being created in export-oriented enterprises.
Thirdly，operational difficulties for enterprises have increased. Enterprises are facing market pressures and seeing increased revenues but not necessarily higher profits. While many enterprises are experiencing pressures on profitability，private enterprises are most affected.
Fourth，there is sustained downward pressure on prices，resulting in a significant impact on market entities.
Fifth，private investment is slowing down. Private investment accounts for about 54% of fixed-asset investment and is the main source of investment. Private investment has decreased by 0.2% this year，which is quite unusual. Some scholars believe that the turning point began in 2012，when the growth rate of private fixed-asset investment was 24.8%，which was higher than the overall investment by 4.2 percentage points. But in 2015，the gap between the two narrowed to only 0.1 percentage point. Private investment had seen a significant decline since the beginning of 2016. In 2022，the growth of fixed-asset investment (excluding investments made by rural households) was at 5.1%. However，the growth of private fixed-asset investment was only at 0.9%.
Due to the intricate and ever-evolving domestic and global environments coupled with the impact of the COVID-19 pandemic，private enterprises have been experiencing decreased confidence in their business dealings. Their production and operational strategies have shifted primarily towards survival，and they have been cautious in terms of investment and development. Factors，including reduced market demands，declining prices and weakening corporate profits have made private enterprises less motivated to expand reproduction.
The profitability of industrial enterprises has decreased，thereby impacting their capacity and desire to invest.
In addition，the real estate market is sluggish. Though there was a modest uptick during February and March，the housing market swiftly plunged in April as buyers struggled to keep up with the demand. In the first half of 2023，a total of 595.15 million square meters of commercial residential buildings were sold，showing a year-on-year decrease of 5.3%. Additionally，the total area of newly started construction was 498.80 million square meters，which saw a decrease of 24.3%.
Lastly，the risk of local debt is currently high. The local real estate market downturn has led to a drastic decrease in land revenue，which has increased the debt risk of some local governments. The hidden debt repayment burden has increased for several local governments due to the real estate market downturn，exacerbating their debt risk.
Discussion 3
Factors contributing to the current shortage of demands
GAO Zhanjun: There are varying perspectives among economists on the cause of the persisting decline in prices. While some fear deflation，others contend that it is a liquidity trap instead of deflation. Despite acknowledging that deflation and a liquidity trap could play a part，you believe that the primary cause of the current economic situation is actually a lack of demands，which is a temporary downturn. In other words，you generally expect prices to return to a reasonable level in the future. Could you elaborate on the factors contributing to the current shortage of demands?
YIN Yanlin: Why is there a shortage of demand? This is mainly attributed to the "three effects" and "two traps." The "three effects" have had a significant impact on people's consumption behaviors and actual incomes due to the COVID-19 pandemic.
Specifically，the "scar effect" refers to the lingering effects of the pandemic on individuals' consumption patterns and financial situations.
Secondly，the “expectation effect”. It is important to prioritize the weakening of expectations due to the expectation effect. Although the central economic conference in the first quarter concluded that the there was a slight improvement in the expectations of the Chinese people，market expectations have not fully recovered to the same extent. In recent years，the flow of funds from households to businesses has been less smooth due to various factors such as the pandemic and difficulties in the real estate sector. In 2022，a significant portion of new deposits came from ordinary Chinese individuals，representing 68.4% of all new deposits，an impressive 17.8% increase from the previous year. Although the attractiveness of real estate for household asset allocation has declined，this shift does not appear to be detrimental to the overall stability of the economy.
Thirdly，there is the “wealth effect”，a phenomenon in which wealth leads to consumption. The fundamental driver of economic growth is the expansion of incomes，which leads to higher levels of consumption. Currently，many people reverse this cause-and-effect relationship in their analysis. They advocate raising incomes to stimulate consumption. When the economy is stagnant and investments are uncertain，increasing income does not address the core issue. The issue of the wealth effect's disappearance has become a pressing concern in the context of the stock and real estate markets. The disappearance of the wealth effect has led to a decline in incomes and expectations，which in turn has reduced consumption and investment that signifies insufficient demand overall.
The "confidence trap" is the first of the two obstacles that people often fall into. The greater the uncertainty in the market，the more arduous it is to advance the economy. This may lead to a self-perpetuating cycle of diminishing confidence.
The second obstacle we must consider is the “money trap”. While a liquidity trap does not currently exist，the possibility of a money trap must be considered. The money supply is sufficient，but it is not being utilized for circulation. The money is not circulating in the real economy，causing consumers，investors，and producers to remain unaware of its existence. The lack of awareness has led to a situation where the importance of money remains unrecognized by all parties involved. Based on our research，we found that only about 30% of newly borrowed funds were used for new economic activities，and a significant portion was used for paying off old debts. Thus，while liquidity growth might seem rapid，the gap between economic and money growth has been widening for a long time. When facing cyclical sluggish economic performance，boosting the economy requires more monetary support，and marginal efficiency will decrease. In 2022，the growth rate of M2 was observed to be considerably higher than the nominal GDP growth rate by a 6.5 percentage point margin. In this scenario，the market demand remains quite low and the price indices，both PPI and CPI，naturally witness a decline.
Undoubtedly，the persistent decline in demand can be attributed to a combination of factors，including the "three effects" and the "two traps."
Discussion 4
Insufficient total demand
GAO Zhanjun: So，how can we address the critical issue of insufficient total demand? Given the current economic landscape，what trends and policies can we anticipate in the near future?
YIN Yanlin: China is currently at a pivotal stage in its economic recovery，with its sustained long-term economic fundamentals unchanged. China's sustained and healthy economic growth is entirely achievable as long as we strengthen our confidence in development. Although economic indicators have remained largely disappointing since the second quarter，it is widely expected that the goal of 5% growth rate for the entire year can still be met，especially ta