China and more spending on growth
To a large extent, it seems that China's economy has rebounded and has awakened again from the shock of the Coronavirus disease Covid-19, in the third quarter of 2020,
China recorded a growth rate of 4.9 percent, and the growth rate may exceed 5 percent in the fourth quarter. Total annual growth for the whole year may not be less than 2%, which is not bad at a time most of the world faces a recession due to the pandemic. But that doesn't necessarily mean the move forward will be smooth.
Consumption growth is a key consideration in determining the potential overall performance of China in 2020. Although third-quarter final consumption figures are not yet available, total retail sales of social consumer goods provide a useful proxy. Here, in particular, the picture is unfortunate, as although the monthly growth in retail sales has shifted from social consumer goods to positive since August, overall sales have fallen by 5.9 percent in the first ten months of 2020 compared to the previous year.
There is consensus within China that the annual growth rate of retail sales of social consumer goods will not turn positive until the last days of this year, despite the recovery in household consumption. But past experiences suggest that final consumption growth will be lower. In 2019, for example, the numbers were 6.3 percent and 8 percent, respectively.
In addition, the most important component of investment in fixed assets - investment in manufacturing industries - fell 6.5 percent in the first three quarters of 2020 compared to the previous year. Growth improved slightly last month, but it remains in the negative range.
When the GDP growth is below the potential growth, the Chinese government has been using all possible means of leverage to stimulate investment in infrastructure. For example, after the global economic crisis that erupted in 2008, the country provided an economic stimulus package worth 4 trillion RMB (609 billion dollars), which contributed to stimulating the growth in infrastructure investment in 2009 by 44.3 percent.
These considerations and reports on growth indicators in the Chinese economy, with a bit of speculation and expectations, indicate that China's economic growth in 2020 will be approximately 2 percent faster than other major economies facing contractions. However, China still faces serious challenges. In this context, two important issues emerge: the first is providing good job opportunities, and the other is financial spending.
China has so far created more than ten million new jobs, exceeding its official target of nine million. But past experience indicates that a 2.5 percent GDP growth is not sufficient to support the creation of nine million high-quality jobs. Indeed, many university graduates struggle to find suitable work. In fact, the explosive growth in employment in China this year may have come at the expense of worker productivity.
On the financial side, China should spend a lot. I know that the Finance Ministry estimates the total general budget revenues in 2020 at 21 trillion RMB, and the budget deficit at 3.7 trillion RMB - about 3.6 percent of GDP. However, this means that the Chinese government has assumed nominal growth of about 5.4 percent in 2020, which is well over the weighted 3 percent (2 percent annual growth, plus 1 percent GDP deflator). Thus, the only way to achieve the target deficit ratio (3.6 percent of GDP) is to reduce government expenditures.
Consumption growth is a key consideration in determining the potential overall performance of China in 2020. Although third-quarter final consumption figures are not yet available, total retail sales of social consumer goods provide a useful proxy. Here, in particular, the picture is unfortunate, as although the monthly growth in retail sales has shifted from social consumer goods to positive since August, overall sales have fallen by 5.9 percent in the first ten months of 2020 compared to the previous year.
There is consensus within China that the annual growth rate of retail sales of social consumer goods will not turn positive until the last days of this year, despite the recovery in household consumption. But past experiences suggest that final consumption growth will be lower. In 2019, for example, the numbers were 6.3 percent and 8 percent, respectively.
Capital formation is another factor determining economic performance. Here we will also wait for the latest figures, even if we have data on investment in fixed assets. Once again, the news is mixed and confusing.
In the first ten months of 2020, investment in fixed assets grew 1.8 percent compared to the previous year. Investment in real estate was, first and foremost, the engine of this growth, as this type of investment recorded a growth rate of 5.6% during the same period. But investment in real estate has finally shown signs of marked weakness.In addition, the most important component of investment in fixed assets - investment in manufacturing industries - fell 6.5 percent in the first three quarters of 2020 compared to the previous year. Growth improved slightly last month, but it remains in the negative range.
When the GDP growth is below the potential growth, the Chinese government has been using all possible means of leverage to stimulate investment in infrastructure. For example, after the global economic crisis that erupted in 2008, the country provided an economic stimulus package worth 4 trillion RMB (609 billion dollars), which contributed to stimulating the growth in infrastructure investment in 2009 by 44.3 percent.
But this time there was no such move, and the effect was clear. Infrastructure investment rose only 0.2 percent in the first three quarters of 2020 compared to the previous year. Growth improved somewhat in the past month but did not exceed 0.7 percent.
One of the areas in which China has beaten expectations is export performance. Although no official date is available yet, there are good reasons to believe that net export growth may have exceeded 10 percent this year so far. However, the ratio of net exports to GDP has barely exceeded 1 percent, and then this will have an impact on overall growth. For China is limitedThese considerations and reports on growth indicators in the Chinese economy, with a bit of speculation and expectations, indicate that China's economic growth in 2020 will be approximately 2 percent faster than other major economies facing contractions. However, China still faces serious challenges. In this context, two important issues emerge: the first is providing good job opportunities, and the other is financial spending.
China has so far created more than ten million new jobs, exceeding its official target of nine million. But past experience indicates that a 2.5 percent GDP growth is not sufficient to support the creation of nine million high-quality jobs. Indeed, many university graduates struggle to find suitable work. In fact, the explosive growth in employment in China this year may have come at the expense of worker productivity.
On the financial side, China should spend a lot. I know that the Finance Ministry estimates the total general budget revenues in 2020 at 21 trillion RMB, and the budget deficit at 3.7 trillion RMB - about 3.6 percent of GDP. However, this means that the Chinese government has assumed nominal growth of about 5.4 percent in 2020, which is well over the weighted 3 percent (2 percent annual growth, plus 1 percent GDP deflator). Thus, the only way to achieve the target deficit ratio (3.6 percent of GDP) is to reduce government expenditures.
This is exactly what the Chinese government did in the first three quarters of 2020, cutting its general balance sheet expenditures by 1.9 percent. This move, however, was diminished by a 6.4 percent drop in public revenues. Local governments also continued to increase their expenditures through local government funds, which were set up to finance investment projects. (In theory, that debt would be repaid from the proceeds of the related investment projects).
Local governments finance their budget deficits by issuing their own project bonds. And this year it allowed it to issue bonds of this type worth 3.75 trillion RMB - a share that those governments have already met. The central government issued its assessed government bonds worth 3.76 trillion RMB, as well as COVID-19 relief bonds worth 1 trillion RMB.
This does not mean that China will inevitably curb spending further. On the contrary, if the government is to meet the upcoming challenges, it must increase the targeted deficit in its budget and implement a more expansionary fiscal policy, supported by a more expansionary monetary policy.
Such an approach carries only a small risk to China, as the state's public debt is 52.6 percent of GDP, which is a small percentage, while the government still has ample room to issue more bonds to support investment in infrastructure that is It would boost growth.
In addition, the real rate of China's GDP growth is less than the potential rate, as the core CPI did not exceed 0.5 percent in October, while the PPI did not break the negative range since last July. Add to this the country's success in containing Covid-19, and fewer concerns about the possibility of a rise in inflation or a significant collapse in China's financial position in the near future. In fact, as the failed austerity policies have shown in a significant number of countries, the biggest risk to China's fiscal position may not come from spending.Of course, the indicators of the Chinese economy remain surrounded by deep structural challenges, which the authorities must continue to work on addressing so that the economy grows steadily and regularly in the coming years. But this goes beyond the scope of macroeconomic policies.