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NovWith regard to the current economic situation in China, some believe that Chinese economy has fallen into “stagflation” in which stagnation and inflation coexist. This point of view is not in line with the actual situation of China's economic operation and therefore it is untenable.
China has, overall, achieved a stable performance while at the same time securing progress in its economic and social development, with the economy operating within an appropriate range.
First of all, take a look at the overall economic situation in China. In the first three quarters, China has, overall, achieved a stable performance while at the same time securing progress in its economic and social development, with the economy operating within an appropriate range. This year, China’s GDP in Q3 grew by 6.5% on a year-on-year basis, down 0.2% compared to that of Q2. The quarter-on-quarter growth rate of Q3 after adjustment was 1.6%, down 0.1% compared to that of Q2. The primary, secondary and tertiary industries grew by 3.6%, 5.3% and 7.9% respectively, and changed by 0.4%, -0.7% and 0.1% compared to that of Q2. It can be seen that the overall economic growth slowed down mainly due to the impacts of the secondary industry.
The main reasons for the recent economic slowdown are as follows. First, China's domestic demand growth slowed down during the transition from “high-speed growth” to “high-quality development”, both in terms of consumer spending and investment, compared with the same period last year. Second, due to the impacts of external unfavorable factors such as trade friction, although export growth has exceeded expectations recently, the momentum of future growth is difficult to sustain and has greater downside risks. Third, after years of development, many private enterprises are facing the pressure of transformation and upgrade, and have encountered various forms of difficulties during operation, resulting in problems such as decreased operational benefits and failing to provide jobs. Fourth, due to factors such as sustained economic growth and disappearance of demographic dividend, the employment cost of enterprises has been rising continuously, and some enterprises have cut production capacity and trimmed the number of employees, thus increasing employment pressure. Fifth, in the context of greater uncertainty in internal and external economic operating environments, the micro-body confidence indexes such as entrepreneur confidence index, resident income confidence index and macro-economic confidence index of banker also fell simultaneously, thus inhibiting investment, consumption and credit to a certain extent.
There are many highlights in recent economic development of China
At present, China has, overall, achieved a stable performance while at the same time securing progress in its economic and social development, with the main indicators maintaining within a reasonable range. There are some highlights in the process of development, including the growing importance of the tertiary industry, the sustained development of new economic industries, the continuous improvement of manufacturing investment, and the constant upgrading of consumption.
According to the indicators of the first three quarters, the proportion of tertiary industry has been increasing. From January to September this year, the added value of the tertiary industry accounted for 53.1% of GDP, increased by 0.3% on a year-on-year basis, and its contribution rate to economic growth was 60.8%, up 1.8% compared to the same period in 2017. The contribution rate of the tertiary industry to economic growth is 25.3% higher than that of the secondary industry, and the importance of service industry to economic growth is increasingly prominent.
According to the industry structure, due to the rapid development of emerging industries and new business models, the added value of related industries has grown rapidly, accounting for an increasingly high proportion. In the first three quarters of this year, the added value of information transmission software and information technology services, leasing and business services, transportation and warehousing and postal industry increased by 31.2%, 9.4% and 8.0% respectively compared to the same period in 2017, leading the growth of other industries. Driven by these industries, the growth rate of added value of the tertiary industry is higher than that of GDP.
In terms of investment, manufacturing investment continued to improve and supported the recovery of total investment. Investment in September rose by 0.1% compared to that of August this year, ending the growth decline for six months in a row. In terms of industries, the growth rates of investment in the primary and tertiary industries in September were 11.7% and 5.3% respectively, down 2.5% and 0.2% compared to that of August. The growth rate of investment in the secondary industry was 5.2%, up 0.9% compared to that in August, thus ensuring a pickup in growth of total investment. In terms of segments, the growth of manufacturing investment in September was strong, picking up 1.2% compared to that in August to 8.7%, and increased for the sixth consecutive month, making it a highlight in recent macroeconomic development. The improvement of investment in the upstream industries including nonferrous, chemical and special equipment was more significant. In addition, investment in some of the “areas of weakness to be strengthened” also had good performance.
In terms of consumption growth, the total retail sales of consumer goods increased by 9.2% year on year in September, up 0.2% compared to that in August. More importantly, in the first three quarters, the contribution of final consumption expenditure to GDP growth was 78.0%, 14.0% higher than the same period in 2017, and the pull effect of consumption on China's economic growth was further strengthened. Meanwhile, consumption continued to rise, with service consumption in the first three quarters accounting for 50.2%, up 0.5% compared to the same period in 2017. In the retail sales of consumer goods, the consumption upgrade goods have maintained a rapid growth.
In terms of foreign trade, the export growth rate in September rose faster than expected due to factors such as the previous exchange rate decline and concentrated exports. Exports increased by 14.5% year on year in September, up 5.4% compared to that in August. In terms of export destinations, exports to developed and emerging economies have improved, with exports to Japan, EU and the United States increased by 10.6%, 9.0% and 0.8% respectively. In terms of the breakdown of products, the export growth rates of both labor-intensive products and electromechanical and high-tech products have increased.
China's economy has not fallen into “stagflation”
“Stagflation” means that the stagnation and the rise of inflation will coexist for a long period of time, rather than a temporary decline in economic growth and a temporary rise in inflation. The recent US-China trade friction has brought great uncertainty to the global economic recovery, and the interest rate hikes of US dollar and normalization of US monetary policy have also imposed great pressure on the stability of global financial markets. China's aggregate demand growth rate has dropped and the upward pressure on commodity price has already emerged, but the current state of development does not indicate that China's economy has fallen into “stagflation”.
First of all, the unfavorable external environment does have a negative impact on China's export-oriented economic development, but there is still room for China to stabilize domestic demand. The growth rate of aggregate demand is a variable highly related to macroeconomic policies, and the goal of stabilizing domestic demand can be achieved through expansionary monetary and fiscal policies. However, China has recently implemented a highly targeted “discretionary monetary policy” to promote economic growth through targeted cuts to required reserve ratios and tax cuts. On one hand, from October 15 this year, the RRR for large commercial banks, joint-stock commercial banks, urban commercial banks, non-county rural commercial banks and foreign banks will be reduced by 1% to replace the medium-term lending facility due on October 15. Some of the released funds will be used to repay about RMB 450 billion of medium-term lending facility due on October 15, in addition to about RMB 750 billion of incremental funds. On the other hand, since October this year, the personal income tax threshold has been raised. On October 20, the Ministry of Finance and the State Administration of Taxation issued the Interim Measures on Additional Special Deductions for Individual Income Tax (Draft for Comment), which will greatly reduce the tax burden of low and middle-income residents and effectively stimulate their consumption. With loose fiscal and monetary policies in parallel, China's economic growth recovery is just around the corner.
Secondly, although the consumer price index rose slightly in the first three quarters compared to the first half of this year, if food and energy are excluded, the core CPI rose by 2.0 % in the first three quarters, the same as that in the first half, so the overall price increase is in a moderate range and there is no serious inflation pressure in the near future. In fact, the moderate increase in price level has a positive effect on the economic recovery, and the current pressure on inflation comes more from expectations. Geopolitics and other factors have led to a sharp rise in global oil prices recently. At the same time, the African swine fever epidemic in China has also resulted in an expected rise in pork prices. All these will impose certain pressure on future price stability. The Chinese government can stabilize expectations and excessive price growth through appropriate macro-control policies. On one hand, moderate expansionary monetary policy can effectively mitigate the impacts of oil price shocks on the production costs of enterprises. On the other hand, through fiscal tax reduction and fee reduction, enterprises can also cope with the impact of oil prices. Meanwhile, we can also achieve the expected effect of stabilizing prices by expanding imports of agricultural products such as pork and maintain the increase of food prices within a reasonable range.
(The author is the Research Fellow of National Academy of Development and Strategy and Professor of School of Economics, RUC)
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