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Macroscope | China’s consumers hold key to hitting GDP growth target of 5.5 per cent
- Consumers must be convinced to spend more money and generate more growth as China’s monetary easing hits the limits of what it can do
- For consumers to take up the slack, the goal for fiscal stabilisation needs to take a temporary back seat while Beijing tolerates larger budget deficits
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There is a strong chance that China’s interest rate easing cycle has reached the end of the road. Substantive monetary easing might be over, but marginal measures such as last week’s 0.25 percentage point reduction in banks’ reserve requirement ratio might be increasingly employed to ease borrowing costs and bolster economic growth ahead.
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More importantly, the priority must shift to greater fiscal reflation to reinforce the government’s target for gross domestic product growth this year of around 5.5 per cent, especially with the global economy showing signs of trouble ahead. World trade growth is slowing down, China’s export drive appears to be losing momentum, domestic manufacturing is still being affected by supply-chain issues and consumer confidence looks less certain.
Final consumption spending accounts for the lion’s share of overall demand at close to 55 per cent of GDP. As such, China’s consumers hold the key to 2022 growth staying on track.
China’s economy has made a remarkable recovery from the depths of the Covid-19 crisis in early 2020. Its GDP bounced back by 8.1 per cent in 2021, a dramatic turnaround from the pandemic-depressed 2.2 per cent growth in 2020.
After surpassing last year’s 6 per cent growth target by a wide margin, Beijing’s more modest 5.5 per cent growth goal for 2022 had, up until recently, seemed within easy reach.
Switching the main thrust of Beijing’s growth policy towards domestic-driven expansion under the dual circulation strategy seemed like a shrewd move to keep the economy well-insulated from the growing threat of international uncertainties. The impact of the Ukraine crisis, the spectre of higher world inflation and the spiralling threat of higher global interest rates have suddenly begun to cast longer shadows over the economy’s growth potential this year.
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China’s business confidence is already feeling the pinch. The latest Caixin/Markit manufacturing purchasing managers’ index fell below the critical 50 boom-bust level in March to 48.1, consistent with contraction in factory sector activity. This is no surprise considering global risks are rising, China’s export boom is slowing and the domestic outlook continues to be overshadowed by lingering pandemic concerns.
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