Tougher times ahead call for pro-growth policies

China should implement expansionary policies as soon as possible to sustain signs of recovery, as its decent economic performance in the first two months of this year was not easily achieved and the country may face fairly huge risks and challenges going forward.

The country's macroeconomic performance exceeded market expectations in the January-February period, according to the National Bureau of Statistics, thus showing signs of recovery in investment and services consumption.

In the first two months, the total value added of industrial enterprises above the designated size－those with an annual core business income of more than 20 million yuan ($3.14 million)－grew 7.5 percent year-on-year, 3.2 percentage points higher than that of December 2021.

The pickup of production indicators showed marginal improvement in supply. China's raw coal production reached 687 million metric tons in the first two months, up 10.3 percent year-on-year, 5.6 percentage points higher than that of last year. In addition, supplies of automotive chips also showed signs of recovery, driving auto production to 4.27 million units during the period, with a year-on-year growth rate of 11.1 percent.

External demand continued to remain resilient. In the first two months, the country's yuan-denominated exports grew 13.6 percent year-on-year. This demonstrates that China still has an advantage over other countries in global supply chains although we should also take the rise in commodity prices into consideration.

The real economy, the part of a country's economy that produces actual goods and services, received strong credit support at the beginning of the year. Yuan-denominated loans to the real economy increased by 4.2 trillion yuan in January, reaching a record monthly high. The real economy received sufficient cash flow despite a year-on-year decline in new yuan loans in February. This also helped with the production recovery.

With the implementation of stabilization policies, fixed-asset investment also increased 12.2 percent year-on-year in the first two months, a significant upswing. Manufacturing investment increased 20.9 percent over the same period, leading to an investment recovery of all of society.

Infrastructure investment also rose 8.6 percent, driving investment growth in related industries, such as electrical machinery.

Investment in real estate development also showed signs of recovery, with a growth rate of 3.7 percent. However, some other indicators, including real estate sales and land purchase expenses, dropped sharply, indicating that the housing sector is still facing huge downward pressure.

The consumption recovery also accelerated but it still takes time for consumption growth to return to normal. Total retail sales of consumer goods increased 6.7 percent year-on-year in the first two months, 5 percentage points higher than that of December 2021. But the growth was still 1.5 percentage points lower than that of the same period of 2019.

In summary, there were multiple factors behind the country's good macroeconomic performance in the first two months. Thanks to complete domestic industrial chains, China maintained a fairly high level of export expansion while external demand remained resilient. A large increase in total social financing in January helped the corporate sector maintain cash flow performance to a certain extent. In addition, the policy encouraging people to stay put during the Spring Festival holiday to contain COVID-19 also restricted the development of some segments of the services sector, and base effect factors thus came into play.

The current signs of recovery are not easily won. China's economy may face greater risks and challenges going forward.

First, the Russia-Ukraine conflict may significantly increase international economic and political uncertainties by raising inflation, restricting the recovery of emerging markets and affecting food security. Therefore, the external environment for China's economic performance may become more unstable. The countries in conflict are important exporters of energy and agricultural products, and comprehensive sanctions on Russia may have a huge negative impact on global supply chains.

Military conflicts and the sanctions imposed by the United States and Europe on Russia will limit supplies and cause commodity prices to remain high. The US and Europe may have to accelerate their steps for monetary policy tightening due to raised inflation expectations.

The rise in commodity prices, damages to global supply chains and interest rate hikes in the US and Europe will put emerging markets under multiple pressures, including the worsening of international receipts and payments, acceleration in capital outflows and intensification of the external debt risks. As a result, economic and financial risks in emerging markets will be greatly increased.

It is expected that the Russia-Ukraine conflict will threaten global food security and may intensify social conflicts in low- and middle-income countries that face food insecurity.

Second, it is difficult to defuse the risks in China's real estate sector in a short time, and this may easily cause an obstruction to credit expansion.

Although there were signs of recovery of real estate development investment at the beginning of the year, sales figures of commercial housing were still largely lower. At the same time, medium- and long-term loans to households registered a rare decline in February, indicating sluggish demand. Real estate companies may face difficulties in terms of cash flow.

Considering that some housing companies are under huge debt pressure, tighter cash flow may trigger their own debt crises and may tighten liquidity within the real estate sector and related industries.

As the current positive manner of economic performance is hard-won and potential risks still exist, China should launch expansionary policies as soon as possible to protect incipient recovery.

China should take the domestic situation as a dominant factor in setting its monetary policy, demonstrate its firm resolve to stabilize growth through clear interest rate adjustments, stabilize investor confidence in enterprises and markets, support credit expansion and lower operating costs of enterprises.

The country should also accelerate the pace of government spending, enhance the efficiency of special-purpose debt fund utilization and step up efforts to stabilize investment to ensure that China still has the capability of guaranteeing the stabilization of aggregate demand and high-quality development, while its economy and society are facing enormous external uncertainties.

At the same time, against the backdrop of commodity price hikes, the government should provide subsidies to middle- and low-income groups regarding their production activities and consumption of daily necessities to better protect people's basic livelihoods. It is also necessary for the government to alleviate pressure on small and medium-sized enterprises to make a profit through structural policy arrangements.

The writers are Zhu He, deputy director of the research department of the China Finance 40 Forum or CF40, a Chinese think tank in the field of finance and economics, and Sheng Zhongming, a research fellow at the CF40.

The views don't necessarily reflect those of China Daily.