China faces slower growth

09:19 by Hubert Fromlet, Kalmar

China’s GDP development in the whole of 2021 (+8.1 percent) seems to look fine at the first sight. However, this high number has to be seen in the light of the weak growth of 2020 (recently revised downward to 2.2 percent) and, consequently, the low comparative levels from 2020.  GDP growth in Q4 (4 percent yoy) reflects current reality much better and must be seen as a disappointment and clear slowdown both by global analysts, their colleagues in China, Chinese politicians and also by many domestic and international companies outside China.

The problem of credibility and the way of sending messages

The publication of the Chinese GDP development in Q4 and the whole previous year – again very early in the middle of January – is usually a major statistical event for Chinese and foreign analysts. This can be said despite the fact or concern that major progress in the statistical quality of China’s GDP as a whole and the different components still cannot be singled out. And certainly not either very much as far as the quality of economic growth itself is concerned since it remains impossible to deeply analyze all GDP components.

Many years of not really reliable Chinese GDP numbers unfortunately means that possible limited qualitative improvements initially remain difficult to be found or confirmed by external experts. Here we come to the psychology of sending and receiving messages, a well-known research area from behavioral finance. At the same time, it is known from research that improvements of institutional shortcomings tend to take quite some time to be visible and / or believable, in certain cases even generations.

What do the new growth GDP numbers really mean? 

If we look at previous official forecasts or objectives for 2021, one can compare with Prime Minister Li Keqiang’s forecast of “more than 6 percent”  for GDP growth at the National Party Congress (NPC) in the beginning of March last year. This objective has been clearly met by the published annual average growth number of 8.1 percent – one more time almost exactly in line with expectations.

Considering the outcome of GDP growth in Q4 leads, however, to the conclusion that Chinese growth has been slowing down markedly in the course of 2021(yoy Q1: + 18.3 %, Q2: + 7.9 %, Q3: +4.9, Q4: + 4.0) – due to gradually higher comparative GDP levels in the course of 2020, and in the last year to distortions from the supply side, corona (fears) and other contributions from uncertainty.

 

The outlook for 2022 – substantial problems are still there

In my view, China will be confronted with different kinds of problems also in 2022. It really should be emphasized that interdisciplinary analysis will be particularly important in 2022 and beyond. Examples of different non-economic approaches with possible impact on the economy can be given for the forthcoming quarters – and partly even years – from

¤  politics: relations to the US, the EU, protectionism;

¤  social challenges: handling  the pandemic (omicron included), demography;

¤  institutions: the ability of managing the real estate problems;

¤  health: the fight against covid-19;

¤ psychology: reactions on Chinese politics in China and abroad, confidence from consumers, investors, financial markets, etc.

Possible growth objectives and indications

Important indications come certainly from the most two most important influential members of China’s dominating political institution, the Standing Committee (of the Central Political Bureau of the Communist Party of China) – with President Xi Jinping and Prime Minister Li Keqiang on the top. Probably at the NPC in March at the latest.

Three alternatives for the GDP-growth objective in 2022 are theoretically in the cards according to my view:

a) an optimistic one ->  would be back to (more than) 6 percent like for 2021,

b) a quite cautious one -> would be 5 percent or less,

c) a position somewhere between the optimistic and the cautious one -> would be around 5 percent.

Even if calculations of China’s potential GDP are extremely difficult to prepare because of the insufficient quality of necessary statistics, one can assume that potential GDP growth when applying official statistics currently may be around 5.5 percent or what I above define as “between optimistic and cautious” (reflecting only half of the potential growth rate that was achieved on average from 1980-2010). Could this current potential growth number turn out to be the official GDP objective for 2022?

Whatever the most correct number for potential GDP growth may be, China’s economic growth has been clearly downsizing in the past decade.

Hubert Fromlet
Affiliate Professor at the School of Business and Economics, Linnaeus University
Editorial board

 

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