Growing pains can be overcome

Still possible to attain GDP growth target over the rest of the year if the pandemic can be effectively contained

China has just unveiled data on its economic performance during the first quarter of the year. According to figures released by the National Bureau of Statistics on April 17, the Q1 GDP was 20.65 trillion yuan ($2.9 trillion), which represented a 6.8-percent year-on-year decline in constant prices. This was the first time that negative quarterly growth was recorded since GDP record keeping started in 1992.

The growth rate was challenged as both investment and consumption recorded double-digit losses, with investment in fixed assets declining by 16.1 percent and total retail sales of consumer goods by 19 percent.

While these two indicators are good proxies for fixed capital formation and final consumption, respectively under certain circumstances, a statistical calculation of GDP is not simply the sum of total retail sales of consumer goods, investment in fixed assets plus net exports, nor is it the sum of final consumption, fixed capital formation and net exports.

Therefore, we cannot simply equate final consumption with total retail sales of consumer goods, nor investment in fixed assets with fixed capital formation. More importantly, there may be significant differences in their growth rates.

Generally speaking, there are a number of differences between statistical concepts and theory-based economic concepts. While each difference may be little, the differences become significant once added on top of each other, which is how most of the so-called inconsistencies in Q1 statistical figures can be explained away.

For example, some have questioned the inconsistency between the decline in economic growth and the decrease in electricity consumption. In reality, electricity consumption and the economic growth rate tend to move in tandem under normal circumstances but not always. During the first half of 2009, the Chinese economy grew by 7.1 percent year-on-year, while total electricity consumption dipped by 2.24 percent. According to the explanation provided by the Department of Energy Statistics of the National Bureau of Statistics, industrial consumption of electricity plummeted due to notable declines in the steel, non-ferrous metal, chemical and power generation industries, all of which are electricity-intensive. During the first three quarters of 2012, electricity consumption grew at a much slower rate than GDP, which once again led many to question the veracity of the released growth rate figure. While the economy was not doing great at that time, it was not nearly as bad as total consumption led one to believe.

While physical indicators can provide information on real GDP growth in China, they do not measure the economy directly. It makes little sense to discredit the GDP figures from the National Bureau of Statistics just because they differ from physical indicators. Due to the many technical issues involved, we should not rush to conclusions.

Currently, many economists are debating whether there should be growth targets at all for this year. Uncertainty over the evolution of the pandemic and the consequent uncertainty in the domestic and global economy certainly make such target setting an extremely daunting challenge. This does not mean that no targets whatsoever should be set, however, because without a target growth rate for the national economy, economic decision-making at different levels will have nothing to lean on and it will be challenging to coordinate economic activities in many sectors.

For example, most seem to agree that stepping up expansionary fiscal policies is necessary in 2020, and that a fiscal deficit equivalent to over 3 percent of GDP should be allowed. If we decide to run up a fiscal deficit of 5 percent of GDP, how much would that be in yuan? Without having an idea of GDP growth in 2020, there is simply no way to calculate how big the fiscal deficit should be.

In China, not all the allocation of resources is done by the invisible hand, especially at an extraordinary time such as the COVID-19 pandemic. The process of setting growth targets provides an opportunity to take a deep dive into many economic development issues and to come up with the right policy response.

As no one can say for sure whether there will be a second wave of the novel coronavirus, it is nearly impossible to project how much the Chinese economy will grow in 2020. All bets will be off if the pandemic stages a comeback. But assuming that the spread of the virus is contained in China and the economy is allowed to operate at its pre-pandemic capacity, and that the situation abroad does not deteriorate significantly, China's potential growth rate should be around 6 percent.

The impact of the pandemic is much like knocking two months off the full calendar year of 2020. If recovery goes smoothly, it is not unreasonable to assume that growth rate in the three remaining quarters would be about the same as the potential growth rate.

Assuming the pre-pandemic potential growth rate to be 6 percent year-on-year, the GDP in the next three quarters would be 69.45 trillion yuan (averaging the GDP in the last three quarters of 2019) multiplied by 106 percent, plus the real GDP of Q1 (18.37 trillion yuan), making annual GDP of 2020 91.99 trillion yuan. From there, it is not hard to work out the real GDP growth rate in 2020, which is about 3.2 percent.

This figure is obviously not a projection but only a very rough estimate, which can be used as a baseline for growth analyses. Based on this estimate, policy measures can be proposed to steer the economy onto the right path in the three remaining quarters of 2020.

In light of this, there is no reason for excessive pessimism over the growth rate this year. The most important factors will be whether the spread of the virus can be ideally contained and the effectiveness of the chosen policy response.

The author is an academic member of the Chinese Academy of Social Sciences and former director of Institute of World Economics and Politics, CASS. The author contributed this article to China Watch, a think tank powered by China Daily. The views do not necessarily reflect those of China Daily.