China’s 2023 economic recovery plan will see a big push for domestic demand amid global uncertainties
Disruptions from China’s zero-Covid exit, a looming global recession and US tensions pose risks, but domestic demand remains key to China’s recovery
Expect a big government boost for consumption and investment expectations, with China’s GDP set to return to 5.5 per cent growth; and Hong Kong’s, to 4 per cent
2022 was not a good year for China’s economy. After Covid-19 disruptions, especially in Shanghai in the second quarter, the mainland economy will probably grow by just over 3 per cent for the year, missing the original 5.5 per cent target. All eyes are therefore on the plan for 2023.
A Xinhua report of the central economic work conference, held in Beijing from December 15-16, showed that the focus was clearly on economic development – fazhan (to develop or development) appears 45 times, followed by gaige (reform) at 13 times, and shichang (market) 12 times. Given that China’s gross domestic product per capita last year, at about US$12,600, was only a fifth of that in the United States, the government has its work cut out to improve livelihoods.
The report’s repeated affirmation of socialist market economics, albeit with Chinese characteristics, should dispel any anxiety about China returning to a centrally planned economy. Also, according to the report, the private sector will continue to enjoy policy support from the government in the same way as the state-owned sector, and property rights will be protected.
China’s “common prosperity” thrust should not be misunderstood. Its anti-monopoly laws promote and assure the efficiency of a competitive market to avoid the plutocracies seen in the US and elsewhere. This should be viewed as a strengthening of the market system.
But the Chinese economy faces significant uncertainties. The first is that its transition from zero-Covid may be economically disruptive in the short term. The second is the possibility of a global recession. Fortunately, China’s economy is no longer dependent on exports, with the main growth driver being domestic demand.
A third uncertainty is the US-China strategic competition, with “wars” in trade and technology likely to be the new normal for the next decade. Some decoupling is inevitable, but the economic impact will be marginal for both economies. After all, the US tariffs on imports from China have only had a small impact on China’s economy.
Export controls on US hi-tech hardware and software can indeed slow down some sectors in the Chinese economy, but not for really essential national projects, such as the building of supercomputers, for which cost per se is not an important consideration. Chinese supercomputers today are built entirely with domestically produced components.
A worker monitors the Sunway TaihuLight supercomputer at the National Supercomputer Centre in Wuxi, Jiangsu province, on August 29, 2020. At least seven Chinese supercomputer research labs and manufacturers have been put on a US export blacklist. Photo: AP
But the US-China strategic competition is unlikely to result in a “hot” war; the casualties and losses would be unthinkable – there would be no winners, only losers. I expect rationality to prevail, just as the US and Soviet Union managed to avoid a war in the last century despite their intense rivalry.
The real question for China’s economy is whether there is sufficient aggregate demand. China is a surplus economy. As long as there is demand, there will be supply. The Chinese economy is mostly driven by internal demand – household consumption, public goods consumption and gross fixed investment, with the last being the most important.
But investment demand is driven by economic expectations. This is where the government has to exercise leadership and try to bolster expectations through concrete action, as was done in 1992 and 2008. I believe there will be a major effort by the government to increase aggregate demand and transform expectations in the new year.
Two major components of China’s gross fixed investment are in infrastructure and real estate. Investment in infrastructure is needed to respond to climate change, for environmental preservation, protection and restoration, for communication, transport and power. Infrastructural investment can also include the construction of schools, universities, hospitals and elderly care homes.
11:05
China housing: Can the world’s biggest housing market boom again?
China housing: Can the world’s biggest housing market boom again?
In real estate, sentiment has been affected by the massive developer failures in the past year, and this in turn has hurt demand for construction and building materials, two major sectors of the Chinese economy.
But residential real estate investments can be supported by not only owner-occupied housing but also rental housing. The government can promote rental housing as a viable alternative to owner-occupied housing, thus maintaining overall housing demand and hence supporting the construction and building materials sectors.
This can bring about a different equilibrium between renting and owning. In some German cities, for example, up to 40 per cent of residents may be renters.
The Chinese Academy of Social Sciences recently released a forecast of 5.1 per cent growth for China’s gross domestic product next year. Even with uncertainties, my forecast is for around 5.5 per cent.
It is an empirical regularity that as the real GDP per capita of an economy rises, its real rate of growth falls. China’s economy cannot continue to grow at a real rate of 9-10 per cent every year as it did between 1978 and 2018, but its real GDP per capita is still in a range that would allow its economy to grow at an average annual real rate of about 6 per cent for at least another decade from 2024.
11:31
As mainland China reopens, what is the market outlook for the mainland and Hong Kong?
As mainland China reopens, what is the market outlook for the mainland and Hong Kong?
As for Hong Kong’s economy, the city, as is well known, has no independent monetary policy – its interest rate must follow that of the US because the Hong Kong dollar is pegged to the US dollar, and it has no authority to change the domestic money supply. But Hong Kong does have the freedom of fiscal policy, which until recently has not been actively used, and mostly in the form of transfer payments such as consumption vouchers.
Hong Kong has almost no public debt, compared to say, Japan, where public debt is about 260 per cent of its GDP, and the US, where the ratio is about 130 per cent. In addition, Hong Kong has ample fiscal reserves. There is room for a more active countercyclical fiscal policy.
With the easing of Covid-19 restrictions and expected recovery of the mainland economy, Hong Kong should be able to grow at over 4 per cent for 2023.
Lawrence J. Lau is the Ralph and Claire Landau Professor of Economics at the Chinese University of Hong Kong, and the Kwoh-Ting Li Professor in Economic Development, emeritus, at Stanford University
