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China’s economy has recovered from the worst, but challenges remain

Experts are divided over China’s economic strategy. While some have argued for more aggressive and expansive monetary and fiscal policies, others advocated for a more prudent and cautious approach

By NewsChina Updated Oct.1

China’s economy grew 3.2 percent in the second quarter over the same period last year, a major recovery from a reading of -6.8 percent from the first quarter of 2020, making China one of the first to recover from the pandemic. As the government has brought the coronavirus crisis largely under control, it is hoped that China’s growth rate could be restored to the pre-coronavirus level. If that is the case, China could be the only major economy to experience positive growth this year.  

But despite the positive signs, China will still face major challenges to meet the employment and livelihood targets laid out by the government, which analysts believe can only be achieved by securing a growth rate of three to four percent. 

Accounting for 55 percent of China’s GDP, consumption declined 3.9 percent on top of a 19 percent drop in the first quarter. In total, retail sales in the first half of the year declined by 11.4 percent from last year. It is expected that consumption will gradually bounce back and recover in the remainder of the year. But a dramatic increase in domestic consumption, or what many hoped would be “retaliatory consumption,” is unlikely.  

In the meantime, China’s exports dropped by three percent and imports by 3.3 percent in the first half of the year. While trade has gradually recovered with exports up 4.3 percent and imports up by 6.2 percent in June, the surge in exports of medical equipment and work-from-home goods may cool in the months to come. Moreover, as the trade surplus accounted for less than 1 percent of China’s GDP, trade has a limited impact on China’s economic growth. 

Now the only potential source for China to boost its growth is the investment sector. In the first half of the year, fixed asset investment fell 3.1 percent, while investment in high-tech industries went up 6.3 percent, a U-turn from a 12.1 percent dive in the first three months.  

But so far, the Chinese government appears reluctant to step up stimulus measures. Following the release of positive economic figures, the authorities appear to have adopted tightening measures. Experts are divided over China’s economic strategy. While some have argued for more aggressive and expansive monetary and fiscal policies, others advocated for a more prudent and cautious approach.  

It seems that China’s policymakers are caught in a dilemma. If Beijing adopts a more expansive fiscal and monetary policy, its financial situation will worsen significantly given the already high rate of declining government revenue. In the first half of the year, overall government revenue declined 5.8 percent. But if it tightens control over expenditure and monetary supply, it will be unable to achieve the desired growth, which would have dire consequences on employment and other economic benchmarks. 

So far, China’s answer to the dilemma is a proactive fiscal policy and a less expansive monetary policy, which is a prudent choice given the uncertainties that lie ahead, including escalated tensions with the US, the impact of massive floods in the Yangtze River area and the risk of future waves of the coronavirus. 

Facing up to these challenges in an increasingly volatile domestic and international environment, China should remain vigilant for the rest of the year. On the one hand, it should continue to push for reforms to stimulate the vitality of market entities, with a focus on safeguarding jobs and supporting the high-tech sector. On the other, it should remain flexible in its policy toolkit to deal with any unexpected situations.