Spend more to achieve greater growth
Special Commentator/Yu Yongding
Published in the 977th issue of China News Weekly on December 21, 2020
Consumption growth is a key factor in determining China's overall economic performance in 2020.
Although the final consumption data for the third quarter is temporarily unavailable, the total retail sales of consumer goods can be used as a useful proxy indicator.
Unfortunately, the situation is not particularly optimistic: although the monthly growth in retail sales of consumer goods has turned positive since August, total sales in the first ten months have fallen by 5.9% year-on-year.
Another key factor that determines economic performance is capital formation.
Fixed asset investment in the first ten months of 2020 increased by 1.8% year-on-year.
This growth is mainly driven by real estate investment, but this type of investment has shown signs of weakness.
Manufacturing investment, the most important component of fixed asset investment, fell by 6.5% year-on-year in the first three quarters.
Although the figure has rebounded last month, it is still in the negative region.
The area that exceeds expectations is exports.
Although there are no official data, there are good reasons to infer that net export growth so far this year may have exceeded 10%.
However, net exports only account for a little over 1% of GDP, so the impact on overall growth will be relatively limited.
The above factors indicate that China's economy will grow by about 2% in 2020, which is significantly faster than other major economies facing contraction.
However, they are still facing severe challenges. Two of the more prominent ones are the quality of employment and fiscal expenditure.
So far this year, China has created more than 10 million new jobs, exceeding the original official target of 9 million.
But experience shows that a 2.5% GDP growth rate is not enough to create 9 million high-quality jobs.
In fact, this year’s large-scale employment growth is likely to come at the cost of lowering labor productivity.
In terms of finances, China needs to increase spending.
What can be confirmed is that the Ministry of Finance estimates that China's general budget revenue in 2020 will reach about 21 trillion yuan, while the budget deficit will be 3.7 trillion yuan, which is about 3.6% of GDP.
But this means assuming that 2020 will achieve a nominal growth of about 5.4%, far exceeding the possible 3% (a 2% annual growth rate plus an inflation deflation rate equivalent to 1% of GDP).
Therefore, the only way to achieve a deficit of 3.6% of GDP is to cut government spending.
The Chinese government has reduced its general public budget expenditure by 1.9% in the first three quarters of 2020.
But this decline is still too small compared to the 6.4% decline in public income.
At the same time, local governments are continuing to increase expenditures through local government funds established to finance investment projects.
Local governments make up for the deficit by issuing local special bonds, and this year is authorized to issue 3.75 trillion yuan of such bonds.
The central government has issued planned 3.76 trillion yuan of government bonds and a total of 1 trillion yuan of anti-epidemic special treasury bonds.
But this does not mean that China must further curb spending.
On the contrary, in order to meet future challenges, the government must increase its deficit target and implement a more expansionary fiscal policy with the support of a more expansionary monetary policy.
This approach is extremely risky for China.
China’s public debt is only equivalent to 52.6% of GDP, and the government still has plenty of room to issue more bonds to support growth-oriented infrastructure investment.
In addition, China's real GDP growth rate is lower than its potential growth level; the core consumer price index in October was only 0.5%; and the producer price index has been in a negative area since the end of July.
Coupled with China's successful containment of the new crown epidemic, there is no reason to worry about a surge in inflation or a serious deterioration in fiscal conditions in the foreseeable future.
In fact, as shown by the failed austerity policies of many countries, the greater risk to China's fiscal position may come from non-spending.
Of course, the Chinese economy still faces profound structural challenges. If it wants to continue to achieve economic growth in the next few years, the government must continue to work hard to meet these challenges.
But this is beyond the scope of macroeconomic policy discussions.
China News Weekly, Issue 47, 2020
Statement: The publication of "China News Weekly" manuscript is authorized in writing