China’s economic health will depend on its Covid-19 recovery
- With the pandemic persisting, Beijing has been alert in applying policy remedies where needed. But whatever else it does, China’s economic performance will inevitably be determined by the success of its fight to control the coronavirus
But, for China, it represents a disappointment: a Caixin survey of economists showed the median estimate for the second quarter was 8.2 per cent growth.
Chinese economists broadly agree that China’s potential growth rate is 6 per cent. So, taking into consideration the base effect, China’s year-on-year growth rate in the four quarters of 2021 should be 19.1 per cent, 8.3 per cent, 6.7 per cent, and 5.5 per cent.
Yet, in the first quarter, growth amounted to 18.3 per cent. This weaker-than-expected performance is, to a significant extent, a result of official policy.
While Chinese authorities implemented expansionary fiscal and monetary policy early in the pandemic, they were eager to normalise it, for fear that it would fuel inflation and compound financial risks.
Though this partly reflects the base effect, policy was undeniably tightened. In fact, in the first half of 2021, China’s public budget deficit was 1.6 trillion yuan (US$247 billion), less than in 2020.
Monetary policy has remained accommodative, but the People’s Bank of China (PBOC) has been cautious, to say the least. In the first half of 2021, social financing rose by 17.7 trillion yuan. That increase is 3.1 trillion yuan less than the figure for the period in 2020. Against this background, it should not be surprising that economic indicators are increasingly pointing to a slowdown in Chinese growth.
The market has widely interpreted this as a signal that the government will implement more expansionary macroeconomic policy in the second half of this year. And such a policy adjustment, though still marginal, has raised hopes that growth will pick up in the second half of 2021, potentially even reaching a level consistent with the potential growth rate.
But a policy change might not be enough. Instead, China’s economic recovery may well depend, above all, on how the fight against Covid-19 unfolds.
The government, still committed to getting infections to zero, responded swiftly, locking down high-risk areas, tightening travel restrictions on medium-risk areas, and quarantining around 100,000 people.
But similar situations have occurred before, albeit on a smaller scale. And with much of the world still not vaccinated, and increasingly transmissible virus variants emerging, they will undoubtedly happen again.
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Moreover, given questions about the long-term efficacy of the vaccines being administered, more time might be needed to provide booster shots or develop more effective alternatives.
And even if China did manage to inoculate a large enough share of its population with effective vaccines, it exists in a globalised world, where many countries have very low vaccination rates.
It is safe to say that the fight against Covid-19 is far from over. For China, this means that more small-scale coronavirus outbreaks – with the associated economic disruptions – are all but inevitable. Given this, it is very likely that China’s total growth in 2021 will fall short of previous market expectations.
This is not to downplay the importance of fiscal and monetary policy. A more expansionary approach could go a long way towards offsetting the pandemic’s economic impact.
In particular, many small and medium-sized companies that have been hit hard by the pandemic need help badly, and the government still has policy room to offer it. In fact, with the right policy mix, China can achieve reasonably good growth in the second half of 2021 and beyond.
David Dodwell is away