China busy street

SINGAPORE, December 3, 2021 – China’s economic recovery from the downturn due to the COVID-19 pandemic remains on track, and policies have been geared toward pursuing high-quality growth. In recent months, growth momentum weakened due to the moderating global economic recovery and several shocks. However, with strong economic fundamentals and sound macroeconomic management, growth is expected to remain robust in 2022. This is according to the preliminary assessment by the ASEAN+3 Macroeconomic Research Office (AMRO) after its virtual Annual Consultation Visit to China from November 8 to 30, 2021.

The AMRO team was led by Lead Economist, Dr. Chaipat Poonpatpibul, while AMRO Director, Mr. Toshinori Doi, and Chief Economist, Dr. Hoe Ee Khor participated in the policy meetings. The discussions covered a wide range of issues, including the pandemic’s impact on the economy; measures to strengthen the real estate sector and reduce leverage across the economy; considerations for further financial opening-up; and efforts to play a leading role in addressing global climate change risks.

Economic developments and outlook

“China’s economy is expected to rebound strongly by 8.2 percent in 2021, before moderating to 5.2 percent in 2022,” said Dr. Poonpatpibul. “The authorities have effectively tackled near-term headwinds, strengthened efforts to address long-term challenges, and made significant progress in boosting socioeconomic inclusion.”

China’s economy grew by a modest 2.3 percent in 2020, and is expected to rebound strongly this year as the successful pandemic containment efforts enabled domestic economic activities to resume, while exports expanded strongly reflecting robust global recovery. In recent months, there have been adverse effects from the moderating global recovery, surging global commodity prices, renewed COVID-19 outbreaks and severe floods, financial problems of some large real estate developers, regulatory adjustments in the high tech sector, and supply-side disruptions including power shortages.

The sequential momentum of China’s economic growth should pick up in 2022. Consumption will likely remain the key driver, supported by a stronger labor market. Exports are expected to hold up well and manufacturing investment will likely remain strong.

Risks and vulnerabilities

Downside risks will remain in 2022. The pandemic is still an important threat to further economic recovery globally. Significant uncertainty continues to hang over the strength and sustainability of external demand. The recovery of China’s domestic economy and labor market remains uneven, with improvements in micro, small and medium enterprises’ activities, and employment of migrant workers continuing to lag behind. US-China technology tensions are expected to be prolonged.

Pockets of vulnerabilities in the financial and property sectors persist. Some policy measures to reduce imbalances and enhance the sustainability of economic growth and development, such as further financial deleveraging and carbon reduction, could have unintended consequences during the transition period.

Policy recommendations

While pandemic control measures have contained domestic outbreaks effectively, China’s zero-Covid policy implies strict control on cross border movements of people and goods.  The authorities are encouraged to review the policy and put in place protocols to facilitate the freer movement of travellers and goods which will contribute to the reopening and growth of the global economy.

As significant headwinds remain, fiscal policy in the near term should continue to support growth and employment, especially in the hard hit sectors. In the medium term, while the authorities focus on generating high-quality growth and narrowing socioeconomic inequality, it would be prudent to safeguard fiscal sustainability by improving the allocative efficiency of spending, and exploring ways to boost tax revenue into the longer term.

Monetary policy has been appropriate and flexible. Several measures to ensure ample liquidity and support credit growth were extended from 2020 to 2021 and should be further extended in 2022. At the same time, careful avoidance of excessive loosening and attendant build-up of risks should continue.

While tight macroprudential policy measures in the real estate sector are appropriate at this juncture, some flexibility in implementation could be considered. This is to avert outsized spillover effects from adverse events, and to avoid significant price corrections and sharp contractions in transactions in the near term, while improving the health of the real estate sector in the longer term.

For the financial sector, it is important to strengthen the capital buffers and risk management capacity of weak banks, enhance regulations and standards for the sector as a whole, and further improve the bank resolution and crisis management framework.

With a sounder financial system, China can pursue further liberalization of its financial sector and capital account more confidently. Developing policy tools to manage larger and more volatile capital flows will be important, as the capital account becomes more open over time.

The government’s strong commitment to further opening up to international trade and investment has been reflected by the recent policy moves to further shorten the negative list for foreign investment, and to apply for the membership of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership and the Digital Economy Partnership Agreement.

China has demonstrated strong determination to address climate change risks. The newly-released national action plan for peaking carbon emissions before 2030 is a well-thought-out plan, which would enhance the credibility of the authorities’ commitment and boost public confidence and serve as a policy anchor to guide the expectations and actions of various public and private entities.

Adverse transitional effects associated with climate change mitigation efforts need to be managed carefully. Fiscal support is needed for poorer regions which are heavily reliant on carbon-based economic activities. The social safety net has to be strengthened further to help workers and vulnerable groups hit by industrial restructuring or the regressive impact of higher energy prices.

The Dual Circulation strategy, which focuses on boosting domestic consumption and enhancing the country’s capacity for innovation while remaining open to international trade and investment, is a long-term work in progress. Policies need to be mapped to concrete action plans with specific timelines, regularly assessed, and carefully adjusted if needed. China’s approach for pursuing technology self-strengthening should continue to include both capacity building and collaboration deepening, through bilateral and multilateral channels. Importantly, China should take into consideration the implications of this overarching development strategy for the ASEAN+3 region.

To pursue the newly-launched Common Prosperity campaign, which aims for a more equitable society, a wide range of policy measures should focus on creating conditions which minimize “starting line” disadvantages for lower-income people, smaller enterprises, and less developed regions. Policy measures must actively seek to provide a greater lift for those who are lagging behind.

Top Row (from L to R): AMRO Director Toshinori Doi, AMRO Chief Economist Khor Hoe Ee, CMOF International Department Director General Yang Yingming
Middle Row (from L to R): AMRO Deputy Director Pan Wenxing, AMRO Lead Economist Chaipat Poonpatpibul, AMRO Senior Economist Foo Suan Yong
Bottom Row (from L to R): AMRO Economist Jiao Zhiwen, AMRO Economist Jerry Huang, AMRO Senior Associate Wang Longgang

Top Row (from L to R): AMRO Director Toshinori Doi, AMRO Chief Economist Khor Hoe Ee, PBOC Department of International Relations Deputy General Zhou Yu
Middle Row (from L to R): PBOC Digital Currency Institute Director Lv Yuan, AMRO Deputy Director Pan Wenxing, AMRO Lead Economist Chaipat Poonpatpibul, AMRO Senior Economist Foo Suan Yong
Bottom Row (from L to R): AMRO Senior Economist Zhai Fan, AMRO Economist Jiao Zhiwen, AMRO Economist Xianguo Huang, AMRO Senior Associate Wang Longgang

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.