Impetus to growth will recover more this year
The gradual waning of COVID-19 in China last year, the normalization of the country's unconventional fiscal and monetary policies, the adjustment of its development strategies, and the rise of new growth drivers will become the most essential forces deciding the nation's economic operations this year.
Owing to the low base effect and the rebound effect, China will maintain rapid growth this year. The country's real GDP growth rate for the full year will be significantly higher than that before the pandemic, and the growth may slow down quarter by quarter.
Currently, the relationship between supply and demand is still unbalanced but the rise of the demand side is speeding up. As national economic circulation remains basically smooth, China has started to build up internal growth drivers.
With companies restoring profitability, household disposable income achieving growth and fiscal income continuing to increase, the Chinese economy is turning from policy-driven growth to spontaneous growth, so this year will be crucial for restoring confidence and guiding market expectations.
Thanks to the implementation of a suite of economic policies to cope with shocks of the pandemic, the speed of China's economic recovery is much faster than the simulation results under circumstances where such policies may not exist. Up till now, China's total industrial output and total investment have resumed growth year-on-year. It means that the internal impetus to the country's economic growth will recover more completely this year, compared with last year.
The positive effects of policies announced last year ensured that the recovery of demand accelerated in the fourth quarter of last year and will speed up further in the first quarter of this year. However, as China will gradually withdraw its unconventional policies, its growth will slow down in the second half of this year.
During the first three quarters of last year, such policies increased the real GDP growth rate by 3.5 percentage points, the real consumption growth rate by 1.9 percentage points, and the actual investment growth rate by 6 to 20 percentage points. As time passes, the policies are taking effect gradually, and their impact on output and investment is remarkably greater than that on consumption.
Compared with the policies launched by European countries and the United States that are focused on securing residents' income and consumption expenditure, China's macroeconomic policies put greater emphasis on stabilizing business and production, which will therefore achieve the goal of safeguarding employment and residents' income and promoting consumption.
If the transitions from supply-side recovery to demand-side recovery and from investment recovery to consumption recovery go smoothly, China may have entered an accelerating period of demand recovery in the fourth quarter of last year, which will likely continue in the first quarter of this year.
China would do well to launch a 3 trillion yuan ($459.9 billion) plan to stimulate consumption and subsidize personal income, as a way to solve problems in the economy while underpinning people's livelihoods.
In our opinion, the government should also launch a 3 trillion yuan infrastructure investment plan to strengthen infrastructure construction with focus on a new type of urbanization and the development of industrial and supply chains by issuing special-purpose bonds, which will leverage private-sector investment.
We also suggest that the government should initiate a 3 trillion yuan plan to give targeted support to certain companies－mainly those that are severely affected by the pandemic and are relatively slow in terms of demand recovery－by cutting taxes, lowering fees and offering loans to them.
According to our estimate, if the suite of expansionary policies take full effect, China's nominal GDP will increase by 7.1 trillion yuan year-on-year in 2020, and the nominal GDP growth rate will be 7.2 percentage points higher than the previous year.
During the same period, household disposable income will grow by 8.14 trillion yuan, which means disposable personal income per capita will increase by 5,814 yuan. Corporate disposable income will rise by 2.43 trillion yuan, not to mention that 75.32 million jobs will be secured.
Currently, both output and investment have rebounded strongly but consumption is recovering at a much slower pace. It shows that there is still room for the suite of policies to achieve further results.
However, policy support for economic rebound will diminish, as China will gradually withdraw various unconventional bailout policies this year. How to select the time, the pace, the route, and the combination of policy instruments of withdrawal will become the core of macroeconomic policy decisions and one of the key factors affecting the trend of economic recovery in the country.
2021 will be the first year of the 14th Five-Year Plan period (2021-25). We believe that the new dual-circulation development pattern, which takes the domestic market as the mainstay and allows the domestic and foreign markets to boost one another, has decided that strategic transformation is the core theme of economic operations this year.
Based on its powerful domestic market, China will connect various links in the economy, including production, allocation, circulation and consumption, break up the monopoly or oligopoly in certain industries, and bring local protection to an end, to establish a virtuous circle of the national economy. The country will also optimize the structure of supply, enhance the quality of supply, and increase the adaptability of the supply system to domestic demand.
After its economy recovers fully from the impact of COVID-19, China must accelerate the launch of a new round of reform and opening-up, with the aim of building high-standard market economic systems, to revitalize market entities and consolidate the stabilization of total factor productivity, a measure of economic efficiency.
During the 14th Five-Year Plan period, China may achieve major breakthroughs in key technologies and key links of the economy. Meanwhile, the country will make strides in the area of digital economy. Therefore, deployment of technological innovation and industrial and supply chain safety will become the basic forces of expansion of demand this year.
Since the outbreak of COVID-19, both China's investment in high-tech industries and high-tech industry value added have maintained high growth. In the context of a new round of technological reforms and the rise of digital production, how to break through the bottlenecks of technological development in key areas has become a major test for the realization of smooth domestic circulation.
The country will speed up efforts to reduce its reliance on imports of high-end equipment and critical parts or components in key industries.
Under the dual-circulation development pattern, which goes hand in hand with regional coordinated development and a new type of urbanization, the central and western regions of China, where cities like Chengdu, Chongqing, Wuhan and Xi'an are located, may achieve rapid growth due to their market depth and innovation capabilities.
Liu Yuanchun is vice-president of the Renmin University of China. Liu Xiaoguang is an associate professor at the university's National Academy of Development and Strategy. Yan Yan is chairman of China Chengxin International Credit Rating Co Ltd.
This article is an excerpt from China Macroeconomy Forum's analysis and forecast report on China's macroeconomy (2020-21).
