Can China spend its way back to glory days of economic growth?

Global economic confidence is still under pressure, although the US debt ceiling crisis has been averted
As world trade conditions weigh on Chinese exports, there is scope for higher domestic consumer demand or more investment in key infrastructure projects

David Brown

Published: 9:15pm, 5 Jun 2023

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Are the glory days over for China’s growth? It’s not just a recent slump in China’s factory confidence or lacklustre consumer demand that is the problem. It’s how to keep the world’s second-largest economy growing at a rate which exceeds expectations and defies the longer-term drift to slower growth, a problem which many mature economies are having to contend with. China’s post-Covid recovery could be running out of steam, at a critical time when the global economy is facing greater challenges.

It should be a time when Beijing’s dual circulation strategy comes into its own and domestic drivers compensate for any shortfalls on the international side. The risk is that Beijing’s growth target of around 5 per cent may be a bridge too far this year and that a gross domestic product range of 3 to 4 per cent may be the prevailing trend in the next five years. Beijing needs to pull out all the policy stops to prevent this. China can do better.

Considering the high expectations for recovery after the easing of zero-Covid controls last December, the economic performance has so far been underwhelming. Year-on-year GDP growth jumped to 4.5 per cent in the first three months of 2023 from 2.9 per cent in the final quarter of 2022, but this should have been better considering the pent-up demand in the economy after last year’s tough trading conditions.

Last year, the economy only added 3 per cent, missing Beijing’s 2022 goal of around 5.5 per cent. The uncertain global backdrop and indifferent domestic conditions mean there’s a lot of catching up to do.

The economy is still vulnerable to global headwinds, something which the dual circulation strategy was originally designed to avoid. In the past few months, exports have bounced back, with overseas sales surging 14.8 per cent year on year in March, from a 10.5 per cent collapse in January, although the growth rate subsequently moderated to 8.5 per cent in April.

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World business conditions are not looking great, with the global manufacturing purchasing managers’ index published by S&P Global and JP Morgan stuck in the doldrums below the boom-bust line of 50 for the past nine months. The worry is that conditions could get even worse in the next few months.

Global economic confidence is under pressure on many fronts. Global borrowing costs are rising, world trade tensions are high and geopolitical risks are acute, while financial market exuberance seems excessive and at risk of a serious correction at some stage.

The world might have been spared a major economic shock over the United States debt ceiling crisis, but financial market sentiment is still exposed to more rounds of monetary tightening by major central banks unless inflation pressures subside much more quickly. The risk is that, if monetary policymakers push too hard, the global economy might slip into recession.

If world trade conditions are slowing, it’s going to weigh heavily on China’s export sector in the coming months, which means Beijing will have to place even greater emphasis on domestic reflation to compensate. If consumer demand and investment spending fail to take up the slack, it means Beijing’s policy bias must stay skewed towards more easing, implying even lower interest rates and more government deficit spending to ensure domestic growth makes up the difference.

In doing so, the question is whether China risks becoming more like the market-driven economies of the US, Japan and Europe, blighted by chronically lower interest rates and with overblown budget deficits becoming the norm. Clearly, there should be some scope for China’s key lending rates to go lower, considering consumer price inflation remains so low at 0.1 per cent. This is critically close to negative inflation or deflation, another sign that the economy is operating well below capacity.

While easier monetary policy could be an option, the harm which cheap credit has already caused to China’s housing sector in recent years suggests there should be better ways to boost economic growth potential without risking additional distortions of domestic asset markets.

Beijing needs to invest more money in key infrastructure projects to build up the mainland’s productive capacity, passing on positive multiplier effects to enhance growth prospects. It means increasing the government’s budget deficit as a percentage of GDP, possibly beyond the recent peak of 8.6 per cent in 2020, but it would be money well spent if it puts mainland growth back on target for 5 per cent this year.

David Brown is the chief executive of New View Economics