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SINGAPORE, July 14, 2022 – China has strong economic foundations to pursue and achieve high-quality growth. The country’s recovery from the 2020 downturn has stayed intact despite the slowdown in H2 2021 and H1 2022 due to COVID-19 outbreaks, headwinds in the property sector, and supply side disruptions. Against the backdrop of a resilient labor market, well-contained inflation pressures, strong external position and sound banking system, China’s economic recovery should regain momentum in H2 2022, with growth for the year coming in at about 4.8 percent.

These conclusions are highlighted in the 2021 Annual Consultation Report on China published by the ASEAN+3 Macroeconomic Research Office (AMRO) today.¹

Recovery and growth

China’s economic recovery from the 2020 downturn has stayed intact despite a slowdown in the second half of 2021 and first half of 2022. GDP growth was a firm 8.1 percent in 2021, with the two-year average at 5.1 percent. Following a moderate pickup in Q1 2022, growth momentum decelerated sharply in Q2 due to serious COVID-19 outbreaks. However, the virus outbreaks have subsided, and the economy is expected to regain momentum in the second half of the year. There has also been considerable unevenness in the resilience of different economic activities to the drag arising from power shortages, supply side disruptions, property sector slowdown, and a weakening of sentiment.

Notwithstanding the unevenness of the recovery, there have been several positive developments. Importantly, labor market conditions have remained resilient. The surveyed urban unemployment rate trended down to 5.1 percent at end-2021 before rising to 5.9 percent at end-May 2022. Job creation in 2021 exceeded the full-year target of 11 million urban jobs, and policy efforts are being strengthened for job creation in 2022. This will help buttress consumption, the key driver of GDP growth. Investment picked up in H1 2021 but slowed significantly in H2 2021 and H1 2022. Boosted by the government’s recent support measures, investment is likely to pick up markedly in H2 2022. Exports have bounced back strongly with the lifting of the lockdowns in Shanghai and other cities.

Reflecting what is anticipated to be a strong rebound in the second half of the year, GDP growth is projected at 4.8 percent in 2022, which is still a brisk pace albeit below the target for the year. Consumption should remain the key driver, boosted by the lifting of containment measures and underpinned by improving labor market conditions.

Risks and vulnerabilities

Risks will still be elevated in the remainder of 2022. The pandemic continues to be a key risk to the global and Chinese economies. Significant uncertainty still hangs over the strength and sustainability of external demand in view of the war in Ukraine. The recovery of China’s domestic economy and labor market could remain uneven. U.S.-China technology tensions are likely to remain elevated. Pockets of vulnerabilities in the financial and property sectors will persist. Some policy measures to reduce financial risks, such as those aiming to bring about gradual deleveraging and boost the sustainability of economic growth, could have unintended effects in the near term, and need to be managed carefully.

Policy responses

China authorities recognize that a cautious yet forward-looking approach for pandemic control is needed. While new outbreaks of the COVID-19 infection are likely to continue in different parts of the world, the symptoms are getting milder in part because of the effective protection afforded by the high vaccination rates, especially in ASEAN+3. Moreover, caseloads have fallen sharply across the world. Hence a calibrated easing of border controls, with protocols to protect the domestic population from imported infection, would allow for greater international travel and facilitate the reopening of the global economy.

Fiscal policy should be supportive of economic recovery, especially of affected sectors, and job creation. Monetary and credit policies should ensure accommodative financial conditions while macroprudential measures should continue to encourage deleveraging and de-risking.

Policies should be geared toward buttressing economic growth, creating jobs, and supporting the climate change agenda. Greater efforts should be made to support enterprises, including micro, small and medium-sized enterprises (MSMEs); facilitate the reallocation of resources from low to higher-productivity or higher-potential sectors; and expand upskilling programs to boost labor productivity.

Elevated debt levels in the corporate sector underscore the importance of further deleveraging of the economy. Given the extensive and intricate linkages across sectors of the economy, a cautious approach which strikes a balance between averting financial contagion and maintaining market discipline would be appropriate.

It is vital for China to persist with efforts to strengthen weak banks, enhance prudential standards and resolution tools for the financial sector, and develop policy tools to address risks which will come with further financial liberalization and greater capital account openness in future.

The significant progress which has been made in developing e-CNY, the Chinese version of central bank digital currency (CBDC) should be built upon, with domestic and global benefits in mind.

On climate change, China’s efforts to achieve carbon peaking by 2030 and carbon neutrality by 2060 should be complemented by measures to address any adverse transitional effects. In particular, it may be necessary, on fairness considerations, to effect income transfers from the rich provinces to the poorer ones which are more adversely affected by the mitigation measures, boost social safety nets for vulnerable households, and mitigate financial risks from asset stranding and green investment.

Dual Circulation is a key overarching strategy for China’s pursuit of high-quality and inclusive growth. Authorities recognize the need to monitor and assess the progress in the implementation of policy measures taken under this strategy and to fine-tune accordingly, including to address any unintended side-effects which may arise from the implementation.

AMRO welcomes China’s strong commitment to the rules-based multilateral trading system and the further deepening of regional economic integration through the Regional Comprehensive Economic Partnership (RCEP).  In this context, China is encouraged to consider ASEAN+3’s common interests when developing and implementing plans for the Dual Circulation strategy moving forward.

¹ The report was prepared based on AMRO’s Annual Consultation Visit to China in late 2021, and data and information available up to May 2022.

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About AMRO

The ASEAN+3 Macroeconomic Research Office (AMRO) is an international organization established to contribute towards securing macroeconomic and financial stability of the ASEAN+3 region, comprising 10 members of the Association of Southeast Asian Nations (ASEAN) and China; Hong Kong, China; Japan; and Korea. AMRO’s mandate is to conduct macroeconomic surveillance, support the implementation of the regional financial arrangement, the Chiang Mai Initiative Multilateralisation (CMIM), and provide technical assistance to the members.

About AMRO’s Annual Consultation Report

The Annual Consultation Report was prepared in fulfillment of AMRO’s mandate. AMRO is committed to monitoring, analyzing and reporting to its members on their macroeconomic status and financial soundness. It also helps identify relevant risks and vulnerabilities, and assists members, if requested, in the timely formulation of policy recommendations to mitigate such risks.