Economic Undertakings

The conceptual fall of Chinese stocks and the decoupling of US-China capital markets

With the end of the Two Sessions, China’s biggest political rally of the year, the country’s next major political event would be the 20th National Congress this fall. By convention, the Chinese leadership will be partially replaced after the National Congress. Premier Li Keqiang said at the two-session press conference that this year will be his last year as prime minister. There is no doubt that 2022 will be a year of great change in Chinese politics.

So what will happen to the Chinese economy this year? Based on the country’s difficult domestic and international scenario over the past two years, China’s economy is unlikely to be easy to navigate in 2022. A more likely scenario is that its economy will face significant difficulties. Following the weak basic impact caused by the COVID-19 pandemic, the country’s economy will undergo several changes.

According to the government work report, the main expected development targets for this year include GDP growth of around 5.5%; more than 11 million new urban jobs created, with the recorded urban unemployment rate to be controlled at less than 5.5% throughout the year; CPI growth around 3%; synchronization of citizen income growth and economic growth; imports and exports have been stabilized and improved with a stable balance of payments. Other goals include grain production to stay above 1.3 trillion kilograms; improvement of the ecological environment with a continuous decline in the main pollutants. In addition, during the 14th Five-Year Plan period, the country’s energy consumption intensity target will be assessed as a whole while maintaining some flexibility, and the consumption of renewable energy and raw materials newly included will not be included in the total energy consumption. control.

In terms of fiscal policy, the deficit ratio this year is expected to be around 2.8%, which is lower than last year. For China, fiscal spending in 2022 has increased by more than RMB 2 trillion compared to last year. Central government spending at its level will increase by 3.9% this year, of which central department spending will continue to grow negatively. Transfer payments from central government to local governments increased by about RMB 1.5 trillion, with a scale of nearly RMB 9.8 trillion, an increase of 18%, the largest increase in many years.

China’s economic development this year will be centered around the 5.5% growth target. It is the first time in more than three decades that China has set its annual economic growth target below 6%. Although it is not news that the country’s economy has entered the medium to high growth stage from high-speed growth, it is still a major event for the Chinese economy to fix the growth target at the level of approximately 5%. As the largest emerging country in the world, the Chinese economy is like a heavy train with many structural problems. He must maintain a certain speed; if it is too slow, some components of the train would fall off. Additionally, China faces an aging population before the country has amassed sufficient wealth. In such circumstances, its most basic task is to maintain steady growth.

Over the past two years, the global economy has been affected by the COVID-19 pandemic. In the face of such disruptions, ANBOUND proposes that China’s economic situation be assessed based on a three-year average. We also noted that due to the low baseline impact, 2021 will see the highest economic growth rate in three years, but the most crucial economic growth rate will be in 2022, which will define the future growth condition. economy of the country. In terms of national politics, China’s economic challenges will also be considered in terms of national politics. In 2020 and 2021, the two-year average growth rate of the Chinese economy was 5.1%. By the end of 2021, its GDP reached 114 trillion RMB.

Scale and growth of China’s GDP, 2001 to 2022

Source: Chinese National Bureau of Statistics, Graphics: ANBOUND

Over the past 10 years, China’s economic growth has slowed. During the period of the 18th National Congress, China’s economic growth rate dropped from 7.7% to 6.7%; and during the 19th National Congress, it continued to slow to 5.1% (based on the two-year average growth rate from 2020 to 2021). Between the years, China’s economic growth rate fell by 2.6 percentage points. With the exception of the 8.1% growth rate in 2021 due to the base effect, there is essentially a linear downward trend. It must be admitted that for China, with a population of over 1.4 billion and increasingly aging, a significant slowdown in the economic growth rate of 2.6 percentage points over the last decade presents a daunting challenge. While the usual characteristic of a period of economic recession is a “widespread loss of economic vigor”, the danger of China’s economic recession cannot be overlooked.

To counter the impact of the pandemic and stabilize economic growth, Chinese authorities have adopted various economic policies in recent years, and the list of these includes proactive fiscal policy, new infrastructure, internal and dual circulation, high-tech, low-carbon development. , etc All of these approaches seek to strike a balance between stabilizing growth, structural adjustment and risk prevention. At both sessions this year, Premier Li used the metaphor of “mountaineering” to describe the 5.5 percent economic growth rate.

Depending on the size of the Chinese economy 10 years ago, a 10% increase in growth would require 6-7 trillion RMB; however, the same hike would now require RMB 9 trillion. It’s like climbing a 1000 meter mountain; if you just need to climb 10% of the way, 100 meters will do. Yet, when climbing a 3,000 meter mountain, climbing 5% would mean climbing 150 meters; and climbing conditions will also change. The climber has to deal with lower air pressure and less oxygen as they climb higher. The pace seems to slow down, but the climber is actually going higher.

What Premier Li described is indeed the real situation. However, it should also be noted that as the base number increases, if economic growth slows at that time, the resulting economic growth gap will also be larger. For example, for a base of 100 trillion, a 2.6 percentage point slowdown in growth would lead to a 2.6 trillion increase in disparity.

China has actually benefited from the pandemic over the past two years, because on the one hand it has strengthened its position as the “factory of the world” thanks to its effective preventive measures against the pandemic, and on the other hand, the United States and other countries launched macro-economic stimulus packages which in turn increased global demand, thereby boosting China’s exports and improving its economic growth. In RMB terms, China’s merchandise imports and exports for the whole of 2021 grew 21.4% year-on-year. Among them, exports increased by 21.2% yoy, imports increased by 21.5% yoy, and the surplus increased by 20.2% yoy. The attractiveness of the foreign market is an important reason for its average growth of 5.1% over two years.

If the aforementioned distinctive factors driving China’s export development fade in 2022, as we predicted earlier, the country’s economic momentum could weaken. In fact, signs are already beginning to appear. According to data from the General Administration of China Customs, in the first two months of 2022, imports and exports grew 13.3 percent year-on-year. Among them, exports increased by 13.6% year-on-year, imports increased by 12.9% year-on-year, and trade surplus increased by 16.3% year-on-year. Compared with foreign trade data for the whole of 2021, the year-on-year growth rates of imports and exports, exports, imports and surpluses in the first two months of this year have slowed by 8.1, 7.6, 8.7 and 3.9 percentage points respectively.

In addition to the development of foreign trade, the recovery of domestic consumption over the past two years has remained sluggish, which weighs on the overall economic recovery. Judging from the data, in 2021, the total retail sales of domestic consumer goods was RMB 44,082.3 billion, an increase of 12.5% ​​over the previous year, and the rate average growth for the two years was only 3.9%. In the second session this year, Premier Li admitted that the current consumer demand is indeed relatively weak, mainly due to weak offline consumer demand. If a large number of enterprises close down, it will seriously undermine the vitality of the market and the standard of living of the people.

Moreover, the impact of the Russian-Ukrainian war is a new shock factor that the Chinese economy will have to face. This indefinite war will significantly drag down the European economy and, to some extent, the Chinese economy as well. Considering the degraded geopolitical context in which China will evolve in the future, economic growth this year or even in the next few years could be severely tested.

Overall, China’s economic growth faces multiple challenges this year. If the 5.5% growth target can be genuinely achieved, this will be considered a satisfactory economic achievement. However, in the historical context of China’s economic development, this figure is not impressive. On the contrary, it should be noted that China will be in a process of continuous economic slowdown for a long time to come. The 5.5% rate, while the lowest target in years, remains a difficult figure to achieve. In the final years of the 14th Five-Year Plan, China’s economy may have to strive to maintain 5% growth.