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Interpretation: 5% growth target feasible

By Xu Qiyuan | China Daily | Updated: 2023-03-13 09:03


The 5 percent GDP growth rate target and the 3 percent fiscal deficit ratio set in the latest Government Work Report have set the tone for this year's economic development as seeking progress while maintaining stability.

The odds are high for China to attain a GDP growth rate higher than 5 percent in 2023, making it also a good time for China to consolidate its position in global industrial and supply chains.

China's economic activities have returned to normal since the beginning of 2023 as the COVID-19 pandemic has subsided. Earlier this year, the majority of 31 provinces, municipalities and autonomous regions set their respective GDP growth targets at 6 percent for 2023.Given the low base in 2022, the outlook for China's economic growth this year is optimistic.

But externally, some major economies face recession risks in 2023 and geopolitical uncertainties still exist. These will result in economic slowdowns if compared to last year. Therefore, the 5 percent growth target is a relatively attainable goal.

Domestically, China's consumption will rebound significantly, propping up inflation at home to a certain extent.

Global inflation levels will contract noticeably this year, with overseas demand weakening and commodity prices declining from last year. These factors will help reduce the pressure of imported inflation on China. Overall, China's annual inflation target of around 3 percent can be achieved.

Although the 3 percent deficit rate target is lower than the 3.6 percent and 3.2 percent targets set at the beginning of 2020 and 2021, respectively, this year's target is already at a high level based on experience of the past decade.

This shows that China's economy has bottomed out from the impact of the prolonged three-year pandemic period. Fiscal policies can be adjusted marginally while taking into account fiscal sustainability. The target has also taken into consideration that China is prepared for new challenges and difficulties both at home and abroad.

Although global inflation will drop this year, it is still at a fairly high level. Economic fundamentals in the United States, which have exceeded market expectations since the beginning of this year, may result in higher-than-expected interest rate hikes. It is necessary to watch China's monetary policy accordingly.

The formation mechanism of the renminbi exchange rate is quite flexible, which means that China's monetary policy is relatively independent from the external environment. It is possible to implement an independent monetary policy according to domestic conditions.

On the other hand, there is room for reserve requirement ratio cuts and interest rate cuts, but the bigger problem affecting China's monetary policy at present is the less-than-smooth transmission mechanism. The process under which currency liquidity is converted into credit is blocked to some extent. The confidence of consumers and enterprises is expected to be further improved.

Policymakers in China, Europe and the US should learn from each other's respective monetary policies. China's fiscal and monetary policies have focused more on production and investment, which Europe and the US can refer to. But Europe and the US have done more to stabilize consumption on a macroeconomic scale, especially to alleviate retail spending hesitancy under the impact of the contagion.

China still faces several challenges. The biggest one remains addressing insufficient aggregate demand, especially lackluster consumer confidence. China's macroeconomic policies need to pay more attention to the consumption end.

The relationship between structural monetary policy and fiscal policy must be properly handled, mainly because fiscal policy is better at handling and responding to structural problems, while monetary policy generally starts from an aggregate perspective.

Due to changes in the external environment, less buoyant exports may drag on economic growth in 2023. The pressure to stabilize foreign trade will thus increase significantly.

Domestically, the rebound in consumer demand is highly anticipated, followed by investment. Normally, consumption is the most stable factor with the macroeconomy. However, the weaker-than-expected GDP growth in 2022 was largely due to weak consumption. But for 2023, consumer demand will be significantly released and is expected to become the most important driving force for GDP growth.

However, special attention should be paid to the two-year average economic growth rate to make sure the macroeconomy and consumer demand have truly returned to healthy growth trajectories. Otherwise, we should continue to maintain the policies to stabilize economic growth, employment and income confidence.

Another major task this year is to increase the liquidity of local government assets and revitalize their existing holdings. The national balance sheet shows that liquidity, rather than solvency, is the biggest challenge facing local government debts. It is necessary to promote the use of various financial instruments so that local governments' existing assets can be allocated in optimized ways and at fairer prices.

The capital costs of local financing do not match the purposes of these funds, the financing costs of local platforms are too high and funds raised at higher costs are used for purposes generating lower yields. It is, therefore, necessary to optimize the division of financial and administrative powers in the central and local governments. The financing structure of public goods, such as infrastructure, should also be improved.

This year may be a good time for China to consolidate its position in global industrial and supply chains. The world may face risks of economic recession this year and financial crises in certain places. Economic growth and financial stability of some developing countries and emerging economies will also face greater pressure. The inflation rate in Europe, especially production costs, is much higher than that in China, which will continue for many years to come. Economic and financial risks are piling up globally, thus multinational companies may hold a wait-and-see attitude for future investments. In contrast, the Chinese economy is expected to perform better.

While China's economy is facing many challenges, aging population is not the key factor from a short-term perspective. On the supply side, there is not a labor shortage due to the aging population now, which means that aging is not the decisive factor. By contrast, China's unemployment ratio is at a relatively high level, especially the case of young workers. On the demand side, the aging population will result in insufficient aggregate demand. But it is a slow variable, which will not exert decisive influence on annual data.

Of course, the aging population will have an important impact on China's GDP growth over the long run, so plans must be made in advance. Feasible solutions include gradually extending the retirement age, increasing human capital accumulation through education and training, and replacing labor with new technologies.

The writer is deputy director of the Institute of World Economics and Politics at the Chinese Academy of Social Sciences.

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

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