The world economy is in the midst of a tenuous recovery. In its latest World Economic Outlook, the International Monetary Fund forecasts that the world economy would grow by 3 percent in 2023, before falling to 2.9 percent in 2024. One of the key drivers is that China’s growth is expected to decline from 5.2 percent this year to 4.2 percent next year. Notably, every 1 percentage point decline in China’s economy usually depresses world economic growth by 0.3 percentage points, but the IMF projects that next year’s global growth rate will be lowered by only 0.1 percentage points, which indicates that growth momentum to offset the impact of China will gain traction.
This is also supported by the recent trade forecasts by both the IMF and the World Trade Organization that put world trade growth at over 3 percent next year. This means that as long as there is no steep contraction in China’s economy next year but only a moderate slowdown to 4.8 percent, world economic growth will still outperform this year, reaching 3.1 percent, still low relative to the average growth rate of 3.8 percent in the 20 years before the pandemic.
Stability is in short supply in this age of change and turbulence. In the short run, the world economy may remain sluggish. That said, signs of a global supply chain restoration and an easing of inflation are emerging. A new round of the technological and industrial revolution is in the making. As peace, development and cooperation are the common interests of all, we expect great-power competition may become more rational, and the strategic competition between China and the United States may become more stable and orderly. Political correctness may give way to pragmatic cooperation, and economic and trade cooperation will again become the ballast underpinning international relations.
However, I believe that IMF’s forecast for China is not exactly in line with reality. Judging from the first three quarters of data, China’s economy has generally been recovering — on an upward trajectory — especially in the third quarter, when the rebound was palpable but the foundation was still weak.
In the first three quarters, China’s GDP grew by 5.2 percent year-on-year in constant price terms. GDP grew by 4.5 percent in Q1, 6.3 percent in Q2 and 4.9 percent in Q3. The major swing is the result of a low base last year. On a quarterly basis, the Chinese economy has made a steady recovery. GDP growth in the third quarter was 1.3 percent, translating into an annual growth rate of 5.2 percent. Overall, positive factors are building for a stable and steady recovery.
First, aggregate demand is improving, but there are structural challenges. Consumption plays a pivotal role in economic growth. In the January-September period, total retail sales of consumer goods rose by 6.8 percent year-on-year; online retail sales nationwide rose by 11.6 percent. Online retail sales of physical goods reached 9.04 trillion RMB, an increase of 8.9 percent, and accounted for 26.4 percent of total retail sales of consumer goods. Foodstuffs, clothing and consumption goods increased respectively by 10.4, 9.6 and 8.5 percent. In the first nine months, commercial property sold — as measured by floor area — fell by 7.5 percent and sales of commercial property dropped by 4.6 percent.
Demand for investment is still relatively sluggish. From January to September, fixed asset investment grew by 3.1 percent year-on-year. However, manufacturing investment grew by 6.2 percent, outperforming January-August growth by 0.3 percentage points. Private investment fell by 0.6 percent in the January-September period, narrowing by 0.1 percentage point compared with the January-August figures. But the real estate market adjustment is not over. In the first nine months, investment in real estate dropped by 9.1 percent year-on-year, weighing heavily on economic growth.
Foreign trade saw structural changes. In dollar terms, total imports and exports fell by 7.2 percent year-on-year from January to September, while total exports fell by 5.7 percent resulting in a trade surplus of $630.4 billion U.S. dollars. In September, total imports and exports fell by 6.2 percent year-on-year in dollar terms but increased by 4.9 percent on a monthly basis), further narrowing the decline. So far this year, China’s orders from the United States, Europe and Japan have declined, but trade with countries and regions participating in the Belt and Road Initiative has expanded. Developing countries also saw expansion.
Second, supply chains are improving steadily. The service sector took the lead in the recovery: In the first three quarters, the value added in the service sector grew by 6 percent year-on-year. Value-added grew in accommodations and catering (14.4 percent), information software and information tech services (12.1 percent), leasing and business services (9.5 percent), transportation and storage (7.5 percent) and postal and financial services (7.0 percent. In September, the production index of the service industry grew by 6.9 percent year-on-year, 0.1 percentage point higher than the previous month, and the growth rate has been picking up for the second consecutive month.
Industrial production was also in good shape. In September, the value added of industry above designated size grew by 4.5 percent in real terms year-on-year. On a monthly basis, the value added in above-scale industry increased by 0.36 percentage points in September. From January to September, the value added in above-scale industry increased by 4 percent year-on-year. In September, the PMI of the manufacturing industry was 50.2 percent, an increase of 0.5 percentage points over the previous month, marking a return to expansionary territory.
The economic recovery is also reflected in the stabalization of prices and abating recessionary concerns. CPI remained essentially flat year-on-year in September, rising by 0.2 percent over the previous month and maintaining positive growth for the third consecutive month. PPI declined by 2.5 percent year-on-year in September, narrowing by 2.9 percentage points from -5.4 percent in June, and rising by 0.4 percent in September, marking positive growth for the second consecutive month.
Overall, the main economic indicators for the first three quarters of the year have been on a rebound trajectory. Going forward, macro policy should continue to seek progress while maintaining stability. This proactive fiscal policy should be implemented with enhanced intensity and effectiveness, and the government should continue to improve its tax- and fee-reduction measures, pivoting support for small and medium-sized enterprises, individual entrepreneurs and industries going through hardship. Also, financial resources and policy tools could be better coordinated to ensure funding where it is needed, especially where key investment projects are in place.
Prudent monetary policy should remain targeted. At the aggregate level, a variety of monetary policy tools have been comprehensively applied to ensure that the growth of the money supply and the scale of social financing basically match nominal economic growth. Efforts should be made to improve the transmission mechanism to better shore up the real economy. Financing costs should be steered down incrementally.
In terms of structure, more policy support should be in place for key areas and weak links, such as inclusive financing for small and micro enterprises and support for manufacturing, green development, innovation and infrastructure. It is important to ensure financing for the completion of pre-sold housing projects and for housing rent loans.
Last comes the real estate sector. In the pre-pandemic era, real estate was at the forefront of driving China’s economy. Real estate investment accounted for about one-third of the country’s fixed-asset investment, and household spending on home purchases accounted for about one-third of total consumption expenditures. Real estate-related industries contributed one-third to China’s GDP growth, as well as one-third of national job opportunities.
But now real estate has shrunk. Compared with three years ago, real estate investment has decreased by trillions, dragging down the incomes of real estate enterprises, along with land transaction revenues of local governments and household spending on home purchases.
An alternative path must be pursued. I believe a digital economy-heavy approach is the answer. Investment should be ramped up by trillions. The same goes for the healthcare and elderly care industry and green and low-carbon development, among others. A multi-pronged approach will tide the economy over and cover the void left by real estate structural adjustments. It will offer a viable pathway leading China’s economy to a promising future.
