hanks to China's effective measures that have brought the Covid-19 pandemic under control, the domestic economy has seen a gradual recovery. In the first two quarters of 2021, China recorded growth of 18.3 percent and 8.3 percent compared to the same periods in 2020. Overall industrial output has surpassed the pre-Covid level.
But the Chinese economy will face major challenges in the second half of the year. First, as the world gradually recovers from the pandemic as the vaccination rollout progresses, demand for personal protective gear, medical equipment and stay-at-home essentials, which has driven up China’s exports, will slowly decline. In the meantime, as countries take measures to diversify their supply chains, the surge in Chinese exports may slowly subside. Annual growth in exports may return to a 10-year average of around 3 percent.
Second, to curb a resurgence in house prices in the past year, China released new measures to cool the real estate market. And after years of massive investment in infrastructure leading to high local government debt, the infrastructure sector, a driving force of China’s economic growth, is expected to cool in the latter half of 2021.
Third, domestic consumption, an important engine of China’s economy, has yet to return to preCovid levels. According to a recent survey conducted by China’s central bank, the People’s Bank of China, 49 percent of respondents said they wanted to save more, a considerably higher level than in 2019. The reason mostly lies in the enduring impact of the pandemic on employment, leading to a decline in real wages and incomes for the working class.
Finally, although the manufacturing sector remains robust, rising inflation, the lukewarm recovery of domestic consumption and uncertainties caused by tech and trade wars with the US mean investors will be very cautious over increasing investment in manufacturing.
The only major potential for growth in the following months is the service sector. As China’s vaccination drive continues, leading to more relaxed pandemic measures, retail, transportation, food and beverage and business service sectors, which account for about 19 percent of added value to China’s economy, should climb to pre-Covid levels. Since these sectors are made up of mostly small and micro-businesses that create many jobs, this should be a major focus of China’s economic policy.
Given these challenges and opportunities, China should maintain the continuity, stability and sustainability of its macroeconomic policy, with a major priority being support for small and micro-businesses in the second half of 2021. In the meantime, the government should continue its policy to nurture a better business environment, increase investment in scientific and technological research and consolidate China’s position in the global supply chain. This means it can better prepare for the evolving uncertainties ahead as the world slowly emerges from the shadow of the global pandemic.