At this year’s annual meeting of the National People’s Congress in early March, Premier Li Keqiang announced China’s GDP growth target of 5.5 percent for 2022. At the time, Chinese experts tended to share the premier’s view that the target was ambitious but not unattainable. Western research institutes and organizations, in particular, already considered the target to be too ambitious. The World Bank (January 2022) projected Chinese economic growth of 5.1 percent in 2022, while the forecasts of the International Monetary Fund (IMF, January) and the Kiel Institute (March) were even more pessimistic (both 4.8 percent).
After the official growth target was announced, both the domestic and global economic environments changed in ways that made it even harder to achieve. The unprecedentedly severe, large-scale and prolonged lockdowns in Shanghai and other cities in China severely curtailed normal business operations, exacerbated supply chain disruption and weighed on consumer spending. Global economic pressures also increased. Lastly, the war in Ukraine slowed the recovery of the global economy and fueled global inflation.
The official economic statistics for China published in April clearly reflected the further increasing downward pressure on the Chinese economy with a worse-than-expected trend. Industrial production in China fell by 2.9 percent year-on-year, mainly due to the decline in value-added in the automotive industry by over 31 percent. However, there are significant differences between individual provinces and regions. Regions with pandemic-related strict lockdowns suffered more than others. Industrial production in the Yangtze River Delta (where Shanghai is located) and the northeastern region (where Jilin is located) fell by 14.1 and 16.9 percent, respectively. This disadvantageous development was not limited to the industrial sector. The service sector (which contributed most of the three economic sectors to China’s GDP growth in 2021) also suffered significantly. Retail sales in China, for example, fell by 11.1 percent year-on-year in April.
Lockdowns weigh on growth targets
The development of the Caixin China General Composite PMI, one of the leading indicators of macroeconomic trends, was also disappointing. It is based on surveys of private companies and covers various business aspects such as sales, new orders, employment and inventories. The index fell from 43.9 in March to just 37.2 in April, with the China Composite PMI reading below 50, indicating a general downward trend in business activity. The sharp decline in new orders, especially new foreign orders, also played a role in this decline.
Against this backdrop, the IMF lowered its forecast for Chinese economic growth this year to just 4.4 percent in April. The new forecast is further below China’s official growth target of 5.5 percent. And the IMF was not alone. The same month, several leading investment banks also corrected their China forecasts in the same direction. The forecasts of Goldman Sachs, Citi, Morgan Stanley and J.P. Morgan for China, for example, were between 4 and 4.3 percent, even lower than those of the IMF.
The Chinese government is aware of the challenges facing the Chinese economy. Some Chinese experts remain convinced that GDP growth of around 5.5 percent is still possible if China can succeed with its dynamic zero-Covid policy soon and takes effective countercyclical measures. The large-scale stimulus package announced in late May signals the Chinese government’s determination to revive the Chinese economy. It also aims to show that the Chinese government is willing to do whatever it takes. It includes six main aspects:
- fiscal policy measures to support businesses and stabilize employment,
- fiscal policy measures to facilitate lending and help small and micro enterprises and individuals, in particular, to cope with liquidity problems,
- measures to stabilize industrial supply chains,
- measures to stimulate consumption and investment,
- measures to ensure energy security, and
- social policy measures.
For example, the 33 planned measures include providing over ¥140 billion in additional VAT rebates to enterprises from an expanded number of sectors, assisting the aviation industry in its bond issuance of ¥200 billion, providing ¥150 billion in additional emergency loans to the civil aviation industry, assisting in the issuance of ¥300 billion in bonds for railroad construction, and easing restrictions on car purchases and partially and temporarily reducing taxes on the purchase of passenger vehicles.
Will the economic stimulus package have an impact?
However, given the inflationary pressures, the high level of uncertainty about the development of the COVID-19 pandemic in China and the already steadily rising public debt to GDP ratio, how much policy leeway does the Chinese government have to effectively stimulate the Chinese economy? Do Chinese experts and Western experts have different assessments of the Chinese government’s policy leeway in this regard? Are there different assessments of the strengths or weaknesses of the Chinese economy? Do Western and Chinese experts have different assessments of the critical economic challenges China faces and how these might affect economic growth? What role will international trade and foreign investment play in helping China meet (or not meet) its GDP growth target? Will the stimulus package have the desired impact? What more or else can China and the Chinese government do to support the country’s economic development?
These questions should be discussed in greater depth by experts from China and the West. For this reason, the upcoming Global China Conversation # 11, “Can China achieve its 2022 GDP growth target of 5.5%?” will bring Helge Berger (IMF) and Justin Yifu Lin (Peking University) together to discuss these and other related issues.
Dr Wan-Hsin Liu is a Senior Researcher in the Research Centers “International Trade and Investment” and “Innovation and International Competition” at the Kiel Institute for the World Economy. Since 2016, she has also been Coordinator for the Kiel Center for Globalization.
Silas Dreier is the Coordinator of the Global China Conversations at the China Initiative of the Kiel Institute for the World Economy. He is also a Master’s student in China Business and Economics at the University of Wuerzburg.
This article is part of the Global China Conversations event series of the Kiel Institute for the World Economy (IfW). On Thursday, June 16, 2022 (2:00 PM, CEST), Helge Berger, Head of the IMF’s China Mission and Deputy Director in the IMF’s Asia and Pacific Department, and Justin Yifu Lin, Professor and Honorary Dean of the National School of Development at Peking University, will discuss the topic, “Can China Achieve its 2022 GDP Growth Target of 5.5 Percent.” China.Table is the media partner of this event series.