Overcoming insufficient demand to enhance growth in China

Business boost: A worker welds a liquefied natural gas tank at a factory in Nantong, in China’s eastern Jiangsu province. If enterprises can achieve higher profitability, employment becomes easier in the country and residents’ incomes increase. — AFP

“INSUFFICIENT demand” could be the key to summarising China’s macroeconomy in 2023. The country has faced insufficient demand since 2021, and this was further aggravated last year.

The analysis of insufficient demand is not based on the country’s growth rate, but on a comparison of supply and demand.

There are two criteria for measuring supply and demand: one is the consumer price level, and the other is the performance of the labour market.

Consumer price levels were stagnant last year, with the consumer price index (CPI) rising by 0.2% and producer price index declining by 3%, while core CPI remained below 1% for four consecutive years, decreasing even further compared to that of 2022.

In terms of the labour market, the surveyed unemployment rate was slightly better than in 2020, but still higher than the level before the Covid-19 pandemic.

There was significant employment pressure on new entrants to the labour market. Meanwhile, the wage growth of migrant workers over the past year was relatively low.

China’s gross domestic product (GDP) growth rate for 2023 is not low compared with other major economies. But why doesn’t the domestic economy feel very good at the micro-level?

The Central Economic Work Conference pointed out that the difficulties and challenges include insufficient effective demand, overcapacity in some industries, weak social expectations, many hidden risks, blockages in domestic circulation, and the rising complexity, severity, and uncertainty of the external environment.

Among these difficulties and challenges, insufficient demand should be the primary concern. If this can be addressed, other problems can be largely alleviated.

Boosting demand can provide strong support for resolving overcapacity.

Similarly, if enterprises can achieve higher profitability, employment becomes easier and residents’ incomes increase, which will naturally contribute to the improvement of social expectations and boost confidence.

Despite some pessimistic voices, I believe that the most prominent challenge China currently faces is not on the supply side, nor production efficiency or resource allocation.

The most prominent issue in China now is on the expenditure side – how to increase expenditure to overcome insufficient demand.

So, what kind of demand do we lack?

Traditionally, the total demand can be split into consumption, investment, as well as exports and imports.

The growth rate of consumption in China last year exceeded the overall economic growth rate, with consumption’s contribution to economic growth on the rise, while the contributions of exports and investment declined.

Total demand can also be divided into that from the private sector and the government sector, which include government-led expenditures and government-led infrastructure investment projects.

In 2023, the growth rate of government spending was lower than the overall average level and the growth level of the private sector, which showed that the contraction in government demand had a significant impact on the phenomenon of insufficient demand.

In terms of monetary policy, there are three suggestions. First, to clearly announce to the market the target of achieving a 2% core CPI. The clearer and more resolute way in which the country expresses this, the better the effect will be.

To announce such an inflation target is akin to telling residents that prices will rise, which will encourage them to consume now.

It is also like telling businesses that prices of goods will rise, leading to rising costs, so they need to invest as soon as possible.

It is equal to telling residents that their savings will depreciate, which will encourage them to increase consumption, investment, and reduce savings. It is also an international practice.

Second, to significantly reduce policy interest rates and depress real interest rates. The expansion of spontaneous market demand relies on price leverage, and price leverage is real interest rates.

Third, a total of two to three trillion yuan of pledged supplementary lending is needed throughout the year to support major investment programmes, such as urban village renovation, affordable housing construction, and infrastructure, that can be quickly remolded for emergency use.

Meanwhile, the targeted growth rate of social financing should stand at above 11%. In addition, it is necessary to restore the vitality of the real estate market. The priority is to restore cash flow for real estate enterprises.

In short, fully implementing policies in these three areas can help the Chinese economy overcome insufficient demand and achieve reasonable growth rates. —China Daily/ANN

Zhang Bin is deputy director of the Institute of World Economics and Politics at the Chinese Academy of Social Sciences. The views expressed here are the writer’s own.

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