Smaller coronavirus outbreaks – with the associated economic disruptions – are as good as inevitable, says Yu Yongding.
BEIJING: In the second quarter of 2021, China’s GDP grew 7.9 percent year-on-year. That was a relatively strong performance, especially given the ongoing impact of the COVID-19 pandemic on the global economy.
For China, however, this is a disappointment: a Caixin survey of economists found that the median was for the second quarter a growth of 8.2 percent.
Chinese economists broadly agree that China’s potential growth rate is 6 percent. Taking the base effect into account, China’s year-on-year growth rate in the four quarters of 2021 should be 19.1 percent, 8.3 percent, 6.7 percent and 5.5 percent.
In the first quarter, however, growth was 18.3 Percent. This weaker-than-expected performance is in large part due to official policies.
While the Chinese authorities introduced expansive fiscal and monetary policies at the start of the pandemic, they have been eager to normalize them for fear that it will would fuel inflation and exacerbate financial risks.
Budget cuts have been particularly rapid. In the first half of 2021, China’s government spending only increased 4.5 percent while revenue increased 21.8 percent.
Although this partially reflects the base effect, China’s macroeconomic policies have undeniably been tightened. In fact, China’s public budget deficit in the first half of 2021 was 1.6 trillion yuan ($ 247 billion) lower than in 2020.
China’s monetary policy remained accommodative, but the People’s Bank of China (PBOC) was cautious to say the least .
In the first half of 2021, social finance rose 17.7 trillion yuan. That increase is 3.1 trillion yuan less than in the same period in 2020.
With this in mind, it should come as no surprise that economic indicators are increasingly pointing to a slowdown in Chinese growth.
China’s leaders are trying well, make up for the slowdown. Earlier last month, in hopes of boosting lending, the PBOC announced that it would cut the mandatory reserve ratio for all banks by 50 basis points.
A few weeks later, the Politburo of the Communist Party’s Central Committee released a communique in which acknowledged that “China’s domestic economy is still unstable and unbalanced” and called for the “construction of major projects planned in the 14th Five-Year Plan” to be accelerated. .
The market has widely interpreted this as a signal that the government will pursue more expansionary macroeconomic policies in the second half of the year.
Such a monetary policy adjustment, albeit marginal, has raised hopes that growth will pick up in the second half of 2021 and possibly even reach a level compatible with the potential growth rate.
But a change in policy might not be enough. Instead, China’s economic recovery may largely depend on how the fight against COVID-19 develops.
Since the lockdown in Wuhan was lifted in early April 2020, China has been able to prevent major local outbreaks and increase the number of daily Keep newly confirmed COVID cases in the low double digits.
Those hopes were dashed last month when several airport employees in Nanjing tested positive during routine checkups. Within a few days, the highly transmissible Delta variant had spread to 22 cities in ten provinces.
The government, which is still striving to reduce infections to zero, reacted quickly, closed high-risk areas and tightened travel restrictions in areas with medium risk and quarantined around 100,000 people.
But similar situations have existed before, albeit on a smaller scale. And with much of the world still unvaccinated and with more and more communicable virus variants emerging, they will undoubtedly recur.
The economic cost of such lockdowns – including restrictions on international travel – is extremely high. Against this background, some virologists, epidemiologists and economists are now arguing that China must get away from its zero tolerance policy and learn to live with the virus.
However, resistance to this approach remains strong. After all, China’s strict approach – made possible by its institutional arrangements and cultural tradition – has kept the country practically COVID-free for several months.
And although the costs, especially for tourism and travel-related services, are high, China can afford them.
Although it has given 1.9 billion vaccine doses to date – mostly of its own Sinovac and Sinopharm vaccines, both of which require two doses – it has to vaccinate more than 83 percent of its population before reaching herd immunity, according to its top epidemiologist Zhong Nanshan.
In addition, given the questions about the long-term effectiveness of the vaccines currently being administered, more time may be needed to give booster vaccines or develop more effective alternatives.
And even if China does, a large enough portion To vaccinate its population with effective vaccines, it exists in a globalized way World in which many countries have very low vaccination rates.
It is safe to say that the fight against COVID-19 is far from over. For China, this means that further smaller coronavirus outbreaks – with the associated economic disruptions – are as good as inevitable.
Against this background, it is very likely that China’s overall growth in 2021 will lag behind previous market expectations.
This is not intended to play down the importance of fiscal and monetary policy. A more expansive approach could go a long way towards offsetting the economic impact of the pandemic.
In particular, many small and medium-sized businesses that have been hard hit by the pandemic are in dire need of help and the government still has policy space to offer it .
In fact, with the right policy mix, China can achieve reasonably good growth in the second half of 2021 and beyond.
Yu Yongding, former President of the China Society of World Economics and Director of the Institute of World Economics and Politics at the Chinese Academy of Social Sciences, was a member of the Monetary Policy Committee of the People’s Bank of China from 2004 to 2006
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