China News Agency, Beijing, March 1. Question: Why do you say that there is no problem with China's economic growth exceeding 5% this year?

　　——Interview with Yu Yongding, member of the Chinese Academy of Social Sciences

　　China News Agency reporter Li Xiaoyu

　　With the major and decisive victory in the prevention and control of the epidemic, there has been an upsurge of "fighting the economy" across China.

Many international organizations predict that China's economic growth will rebound significantly this year.

However, some people believe that the aftermath of the impact of the new crown epidemic on the economy is still there, and it will not be a one-day effort to fully recover.

　　How do you view China's economic situation this year?

Can the triple pressure of demand contraction, supply shock, and weakening expectations be alleviated this year?

What lessons can the experience of China's economic construction in the past few decades provide for today?

Yu Yongding, a member of the Chinese Academy of Social Sciences, recently accepted an exclusive interview with China News Agency's "East and West Questions" to interpret the hot issues of China's economy in 2023.

The interview transcript is summarized as follows:

China News Agency reporter: You previously predicted that China's economic growth rate will exceed 5% in 2023. What are the favorable conditions to support China's economy this year?

Yu Yongding:

There is still a lot of uncertainty in China's economic situation in 2023.

However, if the epidemic can be basically brought under control and there are no "black swan" events, China's economic growth is expected to rebound strongly this year. There are two main reasons.

　　First, there is still a lot of room for China to implement expansionary macroeconomic policies.

In terms of monetary policy, the weighted average deposit reserve ratio of Chinese financial institutions is about 7.8%, while that of the United States has dropped to 0% since March 2020.

Various other policy interest rates in China, such as R007 (seven-day repurchase rate) at around 2% and MLF (medium-term lending facility) rate at 2.75%, still have room for downward adjustment.

　　In terms of fiscal policy, China's fiscal deficit and the ratio of the fiscal deficit to the gross domestic product (GDP) can and need to be greatly increased this year.

There is no need for China to overemphasize the so-called "deficit ratio cannot exceed 3%" standard.

　　Second, the base was low last year.

Considering that China's average annual economic growth rate from 2019 to 2022 is 4.8%, and the two-year average in 2020 and 2021 is 5.51%, a conservative assumption is made that the two-year average growth rate in 2022 and 2023 is 4.5%.

Due to the low base in 2022, GDP growth should reach 6% in 2023.

In January 2023, the container terminal in the Yangshan Deepwater Port Area of ​​Shanghai Port is brightly lit.

Photo by Zhong Xinwang

　　I especially want to emphasize: we should really attach great importance to government debts, especially local government debts.

But we must also see that compared with other countries, the ratio of China's government debt to GDP is still relatively low.

According to the International Monetary Fund (IMF), in October 2021, China's government debt (central government plus local government) to GDP ratio was 71.5%.

Compared with China, Japan’s national debt-to-GDP ratio is 262%, Italy’s 151%, the United States’ 137%, Spain’s 118%, Singapore’s 118%, Canada’s 113%, France’s 113%, the Eurozone’s 95.6%, and Germany’s 69.3%.

Considering China's high savings rate and sound balance of payments, even if China's government debt is measured by a broad definition, China's fiscal position is still better than that of most developed countries.

In February 2023, there were many tourists on the Bund landscape platform in Shanghai.

Photo by Zhou Dongchao

　　In order to achieve high economic growth, China must expand fiscal expenditures to support infrastructure investment (including the completion of the provision of public goods in the fields of medical care, sanitation, education, and elderly care), investment in technological transformation, and so on.

Solving the local debt problem also requires the help of the central government.

China should learn from the failure of Japan's 1996 "fiscal reconstruction plan".

Expansionary fiscal policy means that the fiscal deficit will expand. In 2023, if the government hopes to achieve higher economic growth, it may need to increase the issuance of national debt.

As a country with high savings, supplemented by a low interest rate policy, China should have no problem issuing additional treasury bonds.

　　The key factor in improving the fiscal situation, in the final analysis, is economic growth.

Over the years, both Chinese and foreign experiences have shown that one should not worry too much about adopting an expansionary fiscal policy.

As long as the expansionary fiscal policy can promote economic growth and the interest rate can be maintained at a low level, the financial situation will not only not deteriorate, but will improve over time.

Citizens pass by the People's Bank of China in Beijing.

Photo by Jiang Qiming

China News Agency reporter: Some people believe that the epidemic has had a profound impact on all aspects of China's economic operation, and recovery will be a long-term process.

What do you think about this?

Is the effect short-term or long-term?

Yu Yongding:

The epidemic has indeed disrupted China's supply chain, lowered residents' consumption preferences, and had a double impact on supply and demand.

The bigger problem is that under the epidemic, China's macroeconomic policies are difficult to fully play their role, resulting in the delay in repairing the supply chain.

China's potential economic growth rate may therefore decline significantly.

　　The drop in economic growth is not surprising given the shocks to both supply and demand.

After the government substantially optimizes the epidemic prevention measures, if on the one hand, it implements expansionary macroeconomic policies, and on the other hand, it repairs the supply chain through various policy measures, China can overcome both supply and demand shocks and restore the economy to the growth trend before the epidemic .

It should be noted that fiscal policy and monetary policy should play a more active role in helping SMEs resume normal operations.

During the Spring Festival holiday in 2023, many tourists came here to visit the historical and cultural district of Jiangnan Songcheng in Ganzhou, Jiangxi.

Photo by Liu Lixin

China News Agency reporter: What do you think is the most important thing to pay attention to in order to fully recover the Chinese economy from the impact of the epidemic?

Yu Yongding:

In the short term, it is necessary to adopt expansionary macroeconomic policies.

But fundamentally speaking, expansionary macroeconomic policies only create conditions and buy time for deepening reforms.

To completely get rid of the impact of the epidemic, China needs to accelerate and deepen economic system reform while implementing expansionary macroeconomic policies, especially strengthening the protection of property rights of non-public enterprises, so as to lay a solid foundation for sustainable economic development.

Only in this way can the enthusiasm of enterprises with different ownerships be fully mobilized, governments at all levels and the general public be fully mobilized.

　　If necessary reforms and adjustments are delayed and the opportunity is missed, expansionary macroeconomic policies will lose room to be used when inflation deteriorates severely, and the economy may face the dilemma of "stagflation".

　　As long as we adhere to the policy of reform and opening up and implement expansionary macroeconomic policies, China's economic growth potential will be fully stimulated, and China's economy is expected to usher in a strong rebound in 2023.

In February 2023, in a production workshop in Nanxun Economic Development Zone, Huzhou City, Zhejiang Province, workers were operating the production line of intelligent robotic arms.

Photo by Lu Zhipeng

China News Agency reporter: How do you predict China's inflationary pressure this year?

In your opinion, what level should the inflation rate be controlled at this year?

Yu Yongding:

China has been in a state of low inflation for the past 10 years, but the inflation rate is likely to rise in 2023.

Reasons include: First, it may take longer than people hope for the Chinese supply chain to fully repair.

Second, expansionary fiscal and monetary policies and some forms of monetization of fiscal deficits will create certain inflationary pressures on the economy.

Third, anti-globalization, Sino-US trade conflicts, disruptions in the global supply chain, and rising food and energy prices caused by the Ukraine crisis will all create imported inflationary pressures on China.

Fourth, the possibility of another devaluation of the RMB cannot be ruled out.

In general, we should be fully mentally prepared for this year's inflationary pressure.

　　But it should also be noted that in order to maintain a certain economic growth rate, China may need to endure a relatively high inflation rate within a certain period of time.

How to achieve the optimal balance between growth and inflation may become a key challenge for Chinese policymakers this year.

In January 2023, at the dock of Dongfang Company in Lianyungang Port, Jiangsu, a large number of automobiles were ready to be shipped and exported.

Photo by Wang Chun

China News Agency reporter: The central government has recently emphasized that this year's economic work should start with improving expectations and boosting confidence. What do you think are the key points for improving expectations?

Yu Yongding:

The so-called "weakening expectations" that China has faced in recent years should refer to the weakening expectations of China's economic growth prospects, including income growth and employment prospects.

Weakening expectations have a mutual causal relationship with demand and supply shocks, but they are not concepts at the same level.

　　The expected weakening can be seen in two stages before and after the epidemic.

Before the outbreak of the epidemic, China's GDP growth rate has dropped quarter by quarter since 2010, from 12.2% in the first quarter of 2010 to 6% in the fourth quarter of 2019.

There is a view that if China's potential economic growth rate is lower than 6%, the subsequent GDP growth rate will further decline.

In 2019, there was a debate about whether the economic growth rate should be "guaranteed to be six", which is a concrete manifestation of the weakening of expectations.

The already weakened expectations were further weakened by the outbreak and its disruption to supply chains and dampening demand.

The weakening expectations in turn hamper supply and demand, especially the recovery of demand.

In February 2023, workers were busy in the production workshop of an enterprise in Xingren Town, Tongzhou District, Nantong City, Jiangsu Province.

Photo by Xu Congjun

　　In my opinion, the fundamental way to make expectations stronger is to reverse the trend of continued decline in economic growth and eventually restore the economy to a growth rate of around 6%.

If the economy continues to slow down, pessimistic expectations will be further self-reinforcing, causing a greater impact on supply and demand.

　　Of course, there is another type of expectation problem, which is related to issues such as property rights protection and the construction of the rule of law.

Although such expectations do not belong to the scope of macroeconomic policy, their importance is self-evident.

(over)

　　Respondent profile:

　　Yu Yongding, Ph.D. in Economics from Oxford University, member of the Chinese Academy of Social Sciences, and academic consultant of the China Finance Forty Forum.

His research fields are macroeconomics, international finance, and world economy.

He was awarded the Sun Yefang Economic Science Award.