How China can protect economic growth as world recession risks rise

China’s shift towards more domestic-driven growth has helped shield its economy from the worst of the global downturn but it has to step up a gear
All it needs is a four-pronged policy to lower interest rates, improve credit conditions, provide more fiscal reflation and maintain a competitive currency at the same time

David Brown

Published: 10:00pm, 17 Oct, 2022

Why you can trust SCMP

The global economy has an uphill struggle to avoid recession over the next year. The war in Ukraine, the energy price spike, tighter monetary conditions and a slowdown in world trade are throwing growth projections into disarray.

World recession may be avoided but it will require a mighty effort on the part of global policymakers, when time and resources are running out. China will avoid recession but the odds are that this year’s growth will come well below earlier plans for 5.5 per cent, after an 8.1 per cent outturn last year.

Domestic-led growth should be sufficient to provide a reasonable forward momentum and the weak renminbi will ensure China’s exporters enjoy a competitive advantage. China is fortunate to have plenty of policy options to fall back on and it’s time for Beijing to step up a gear to secure the best outcome.

The scale of the economic headwinds facing China’s economy should not be underestimated, not least after recent warnings by the International Monetary Fund that parts of the global economy could slide into recession in the coming months.

The US economy is in a technical recession and the odds are that Europe is not far behind, facing a turbulent time over winter as the impact of Russia’s energy squeeze begins to bite.

Despite this, the IMF seems relatively upbeat on China’s prospects, expecting gross domestic product to rise by 3.2 per cent this year and 4.4 per cent next year. But the economy is still operating below strength, with scope to do better.

How US and European recession risks could play out for China

While China’s shift in focus towards more domestic-driven growth has helped protect the economy from the worst effects of the global downturn, international factors are still having an impact. Consumer confidence has slumped dramatically since the start of the year, according to official data, falling to 87 points last August compared to 121.5 last January.

So far, China’s consumers have been relatively unscathed by the impact of higher energy prices, with headline inflation only rising to 2.8 per cent in September, below Beijing’s 3 per cent expectation, compared with annual wage rises across the economy averaging around 10 per cent based on end-2021 data.

Real incomes in China are being affected but nowhere near as badly as consumers in the United States and Europe, where the cost-of-living squeeze has been much more damaging, from higher headline inflation rates and wages failing to keep up.

02:49

Chinese shoppers snap up used luxury goods amid economic slowdown

Despite the impact of Covid-19 restrictions, consumer spending is slowly starting to recover, but there is still a long way to go with annual retail sales growth stuck in negative territory as recently as in May. With consumer spending accounting for up to 60 per cent of China’s gross domestic product, more policy easing will be needed to lift household morale.

Business confidence needs a bigger boost too, with the latest Caixin purchasing managers’ report for manufacturing showing sentiment dipping deeper into the territory of contracting economic activity, falling to 48.1 in September below the critical 50 boom-or-bust line.

The lack of optimism is not surprising considering the slowdown in global business conditions and the IMF expecting world GDP growth to sink to 3.2 per cent this year and 2.7 per cent next year, after 6.1 per cent last year. The IMF considers a 25 per cent probability that world growth could be even worse next year, falling below 2 per cent. It’s hardly a positive backdrop for China’s manufacturing or export sectors.

These are big challenges but Beijing still has plenty of firepower to maintain good forward momentum. All it needs is a four-pronged policy to lower interest rates, improve credit conditions, provide more fiscal reflation and maintain a competitive currency at the same time.

There is scope for more interest rate cuts if need be, and potential to further lower banks’ capital reserve requirement ratio to ease the cost of lending for borrowers. Beijing is keeping the money markets flush with liquidity, with the latest M2 money supply figures showing annual growth running at around 12 per cent, more than adequate to support faster expansion.

Beijing can afford to do more on the fiscal front too, with extra deficit spending targeted to boost recovery. Even the renminbi, with its close-to-record lows against the US dollar, can do its bit for export-led growth.

In a stagnating global economy, China could offer investors a better measure of growth stability in turbulent times.

David Brown is the chief executive of New View Economics

Post