Author: Yang Yao, PKU
Forecasts for China’s economic growth in 2023 are broadly divided. International organizations and overseas China watchers reasonably predict 4% growth, but most Chinese economists think he is more likely to grow 5-6%.
This discussion has a lot to do with assumptions about China’s potential growth rate. Many models can be used to estimate potential growth, but the simplest and most reliable is the Solow model. Based on this model, a country’s GDP growth rate depends on its net capital stock, population size, and total factor productivity growth rate.
China’s population is currently stalling and capital growth depends on state savings. China has the upper hand in this regard, with national savings accounting for 45% of GDP. China’s net capital stock is 3.6 times GDP with a depreciation rate of 5%. This means that annual savings translate into his 7.5% growth in net capital stock.
GDP growth driven by capital accumulation would be half of this, or 3.75%. Previous studies have found that total factor productivity growth contributes 20-40% of GDP growth. Based on this calculation, China’s potential growth in 2023 is in the range of 4.7-6.3%, justifying the forecasts of Chinese economists.
However, China faces several challenges to reach this potential growth rate in 2023.
The first is how the COVID-19 pandemic continues to evolve. Chinese authorities lifted the country’s strict zero COVID policy in early December 2022. Infections peaked rapidly in most provinces, but the travel and retail sectors recovered quickly afterwards. Whether there will be a second wave of infections in the spring and how severe it will be is uncertain. Given this uncertainty, we cannot expect high growth rates in his first two quarters of the year.
The Chinese government should prepare for a second wave of infections. This includes expediting immunization, expanding ICU capacity, and strengthening medical supplies.
The second challenge is the decline in external demand. The bottleneck to China’s economic growth is clearly on the demand side, with 20-30% of production capacity sitting idle on average.
Over the past three years, the Chinese government has relied heavily on investment to boost demand. However, the incremental return on this investment is declining. Capital formation has contributed at most 2 percentage points to China’s growth in recent years.
Exports have contributed significantly to sustaining China’s growth over the same three years. However, with recession fears looming large over the global economy, it is highly likely that external demand will stagnate in 2023. China must shift to domestic consumption to generate enough demand to sustain growth.
This leads to the third most difficult challenge to China’s growth in 2023. Prior to the outbreak of COVID-19, domestic consumption had grown by a respectable 7% in most years. The share of domestic consumption in GDP has increased from 48% in 2010 to 55% in 2019. However, domestic consumption has slowed down over the past three years. For China to reach her 5.5% potential growth rate in 2023, consumption growth needs to account for at least this 3.5 percentage point. This requires at least 6.36% consumption growth, which is no easy feat.
Two factors help drive consumption. One is the recovery of consumer confidence after the pandemic. This could help release excess savings that households have accumulated over the past three years. There is reason to believe that consumption will pick up in 2023, judging by the rapid recovery in the travel and retail sectors after the first wave of infections.
Another factor is the stabilization of the real estate sector. The real estate sector has plunged sharply in his 2022 due to government attempts to prevent overheating. The Chinese government began to shift its policy in his second half of 2022 and is now lobbying local governments to support the sector. As a result, the real estate sector will halt its decline in 2023 and have a positive impact on consumption.
However, these two factors may still not be enough to generate 6.36% growth in domestic consumption. Chinese authorities have identified promoting consumption as a top priority for 2023, and may roll out more policies with this as a goal.
Some local governments issue coupons to boost consumption. Consumption coupons equate to price discounts, which in most cases can be redeemed for a 20% discount on specified purchases. The problem is that these coupon schemes are still very small. In a province with an economic scale of 7 trillion yuan (about $1 trillion), the value of the latest coupon scheme is only 200 million yuan (about $30 million), too small to produce a noticeable effect. was.
Preliminary calculations show that for every 1% of GDP spent on consumption coupons, GDP growth increases by 0.78%. This is provided that there are no restrictions on the products that can be purchased with the coupon. Currently, coupons can only be used on specified products. Coupons can also help boost confidence in the Chinese government’s commitment to growth-promoting policies, resulting in further growth in consumption.
For China to reach its potential GDP growth rate, the government needs to continue to promote these growth-promoting policies and make more efforts to boost domestic consumption.
Yang Yao is a Cheung Kong Scholar, Senior Professor of Liberal Arts, Dean of the National School of Development, and Director of the China Economic Research Center at Peking University.
