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China’s Growth Target

Mar 24, 2022
  • Xu Hongcai

    Deputy Director, Economic Policy Commission

5.5 percent growth is achievable, but inflationary pressure looms

The 2022 Chinese government work report set out a 5.5 percent growth target for 2022, higher than the IMF projection of 4.8 percent. I believe this target is consistent with China’s potential economic growth rate and the average growth rate of the previous two years. At the same time, it indicates that the central government will intensify its policy efforts to maintain the overall stability of the Chinese economy. Q1 of 2021 represented a high baseline situation, and Q1 of this year saw modest growth. But things are expected to take an upswing in Q2 and remain on an upward trajectory.   

In terms of inflation, the CPI rose 0.9 percent throughout last year, which is not high. But the PPI stayed elevated. The CPI rose 0.9 percent year-on-year in February this year, but the PPI marked an 8.8 percent year-on-year increase. The reason for the marked spread between CPI and PPI is that manufacturers absorbed the upstream costs, especially small and medium-sized enterprises that are hesitant to hike prices due to fierce competition. Subdued pork prices also aided the low CPI level. In the short term, the CPI may not rise significantly, but rising global commodity prices, including food and fertilizer, induced by the Ukraine crisis will bear on pork prices. Consumers already feel the pinch of the recent price increases for refined oil. Under global inflationary pressure, small and medium-sized enterprises and the real economy will inevitably be negatively affected. 

Targeted reduction of taxes and fees 

The government work report set the deficit-to-GDP ratio for the year at around 2.8 percent, which is lower than last year. It increased expenditures by more than 2 trillion yuan over last year. Central government transfer payments to local governments will come to close to 9.8 trillion yuan, and that represents growth of 1.5 trillion yuan. Meanwhile, special-purpose bonds for local governments will total 3.65 trillion yuan this year and take a performance-oriented approach to appropriately widen the scope of usage for such funds. 

Practice proves that tax cuts play a catalytic role for small, medium and micro enterprises and for the real economy, which in turn has led to an expanded tax base, tax revenues and a notable increase in fiscal revenue. In other words, even if tax and fee cuts are scaled up, the actual fiscal deficit ratio will fall. For 2022, the proactive fiscal policy will be more targeted and ensure that funds go directly to the local governments without increasing the total expenditures and ensure the money is put to the best use.

Governments at all levels have established mechanisms to strengthen supervision of the use of funds at the grassroots level. For key projects in the 14th Five-Year Plan, relevant policies will be launched promptly to produce results early on and speed up the implementation of the projects. 

Implementing an employment-first policy and improving the income of urban and rural residents 

The government work report mentioned that 100 billion yuan from the unemployment insurance fund will be used to support enterprises in maintaining stable payrolls and providing training programs to accelerate the training of talent urgently needed for high-quality development in the manufacturing industry. It is worth noting that this year, employment is facing multiple pressures.

Another 10 million college graduates will seek to join the work force. Rising manufacturing costs lead  to a decline in the ability of small and medium-sized and micro enterprises to absorb employment. Businesses engaged in foreign trade will have fewer vacancies due to rising costs and weakened external demand. The real estate and digital sectors already experienced substantial layoffs due to policy adjustments last year and now are under reemployment pressure.

Currently, the Chinese economy faces an acute problem of inadequate domestic demand and sluggish external demand. Job creation and income hikes are the primary drivers of domestic growth. Therefore, to unleash the fundamental role of consumption it is essential to mitigate the adverse impact of the pandemic on small, medium and micro companies and to fully implement all measures to stabilize employment.

Temporary policies such as reductions of premiums for unemployment insurance and workers’ compensation will be extended. In addition, the policy of refunding unemployment insurance premiums to enterprises that make no staff cuts, or minimal cuts, will send a greater proportion of refund money to small, medium and micro companies.

The report also noted that measures will be rolled out to boost personal incomes through multiple channels, improve the income distribution system and increase people’s spending power. We will strive for in-depth integration of online and offline consumption, promote recovery of consumption in consumer services and foster new forms and models of consumer spending. The most hard-hit sector is the service industry, such as catering and tourism. Many small and micro enterprises are in the sector, with clusters of employment groups most affected. 

Expanding investment in infrastructure

Increasing investment in infrastructure is the main area in which the government can play a fundamental role. Active fiscal policy involves increased spending on one hand while reducing the tax burden on businesses and residents on the other.

China launched a phased expansion of infrastructure investment in response to the 1997 Asian financial crisis and the 2008 global financial crisis. The current return on infrastructure investment is not obvious and will increase the debt risk of local governments, but when demand is weak and market failures occur, the visible hand of the government must step in and pursue counter-cyclical regulation.

The report stated that special-purpose bonds for local governments will total 3.65 trillion yuan. Guided by a performance-oriented approach, measures will be taken to ensure that investment funds stay with the projects they are allocated to, and appropriately widen the scope of usage for such funds.  Construction will commence on major projects involving new types of infrastructure and the renovation of outdated public facilities. Key fiscal support will be directed to new urbanization and new infrastructure, plus major livelihood projects.

The infrastructure policy has long been informed by a people-oriented philosophy, and addressing the weak link of rural public infrastructure at the county level is a priority, including medical care, education, health, culture and entertainment, all of which will require more investment in the future. Investment will remain the ballast for the smooth running of the economy in 2022, and infrastructure investment will be the key driving force to boost domestic demand. 

Carbon peaking and carbon neutrality targets featured again

Achieving a carbon peak by 2030 and carbon neutrality by 2060 is once again included in the government work report, as China continues to fulfill its solemn commitment to the world. I believe the digital economy will provide an important means of reducing carbon emissions, and there is great potential for digital development and green finance. Traditional industries are generally more energy-intensive, so upgrading of traditional industries enabled by digital technology can save energy and reduce carbon emissions.

On the other hand, low-carbon green lifestyles are an international trend, and the development of the digital economy can provide more specific applications. Creating a positive loop between the digital economy and green development will boost China’s high-quality economic development.

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