Covid-19, Ukraine war and property downturn all add to China’s economic policy challenges

China’s slowing export growth rate has sent shivers through global stock markets, and consumer spending growth decelerated sharply in April
Monetary policy should stay steady to minimise inflation risks and maintain exchange rate stability, while the focus should be on cutting taxes and fiscal spending incentives

David Brown

Published: 2:15pm, 23 May, 2022

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China’s export markets are slowing, which is no surprise considering the heavy headwinds buffeting the global economy. The Ukraine war, inflation pressures and central banks fighting back with higher interest rates are all taking their toll. Global economic confidence looks vulnerable, recession talk is back in vogue and world trade growth is slowing.

So, it’s no surprise to see China’s export growth rate slowing to 3.9 per cent year on year in April, from 32.2 per cent a year ago when the export sector was bouncing back from the depths of 2020’s Covid-19 crisis. It has sent shivers through global stock markets, fearful that this may be the harbinger of tougher times.

If the world’s foremost export economy is feeling the pinch, then the world may be in deeper trouble than previously thought. It means Beijing has to go overboard on policy stimulus to stand a good chance of hitting its 5.5 per cent growth target this year.

But does China need faster export growth when the economic focus should be on reinforcing domestic demand under the ambit of its dual circulation drive – getting the best out of internal growth and reducing exposure to volatile international trading conditions?

Beijing may be scaling back its traditional reliance on export growth, but it should be glad of any extra support to meet its growth objectives in challenging circumstances. The weaker renminbi should help, especially after the sharp 5.5 per cent depreciation against the US dollar over the past two months, but that might be a mixed blessing.

It may be a bonus for hard-pressed exporters, but Beijing should avoid stoking trade tensions with Washington when the stronger dollar may be pricing US exporters out of China’s domestic markets.

Despite the challenges, on the surface, the economy still seems to be doing fine. The latest gross domestic product figures show that it expanded by a seasonally adjusted 1.3 per cent in the first quarter of 2022, surpassing estimates for a 0.6 per cent gain, after a 1.5 per cent advance in the final three months of 2021.

On a year-on-year basis, China’s economy grew 4.8 per cent, which means it has some catching up to do to hit the 2022 target of around 5.5 per cent.

Amid Covid-19 lockdowns, a prolonged downturn in the domestic property sector and uncertainty over the war in Ukraine, it’s no wonder economic forecasters abroad are scaling back expectations that China’s growth can reach its target this year.

When you scratch the surface and look more closely at underlying demand components, doubts creep in. The latest retail sales data shows that consumer spending growth decelerated very sharply, from 17.7 per cent year on year in April 2021, to an 11.1 per cent year-on-year contraction this April.

The gloomy international backdrop hasn’t helped, while the lockdowns in China’s major cities have added more uncertainty for consumers. The manufacturing side of the economy is struggling too, with industrial output down 2.9 per cent in April from a year ago, facing ongoing problems from the pandemic.

Some areas of manufacturing are suffering worse disruption, with April car production down 42 per cent from a year earlier.

Slower import flows into China underline the softer trend in domestic demand, with mainland imports showing zero growth from a year ago. This compares with 52 per cent import growth year on year as recently as last May, when the economy was in the full flush of recovery from the 2020 Covid-19 crisis and demand for raw materials and production goods was surging.

The economy will recover as the latest Covid-19 wave recedes, and there are key policy options for Beijing to consider. The challenge will be finding the right policy balance between growth and inflation.

Monetary policy should remain steady to minimise inflation risks and maintain exchange rate stability for the renminbi. Preserving the currency’s competitive gains without triggering more downside risk must be a high priority. Beijing’s stimulus drive should focus on putting the right tax-cutting and fiscal-spending incentives in place to improve the chances of recovery.

Economic headwinds will abate, stronger domestic growth will resume and faster export recovery will help improve the chances of eventually hitting 5.5 per cent GDP growth this year.

David Brown is the chief executive of New View Economics