As China emerges as a global economic superpower, shifts in its growth trajectory are increasingly significant for the region and world. The Singapore Institute of International Affairs held a hybrid talk on 19 April 2022 on “Challenges for China’s Economy: Growth amidst Zero-Covid and Implications for the Region”, featuring perspectives from Professor Fan Gang, Executive Director at the National Economic Research Institute of China and Professor Bert Hofman, Director of the East Asian Institute at the National University of Singapore. The session was held under the Chatham House Rule.
Economic impacts of the Zero-COVID Policy
Despite China’s efforts to mitigate the effects of the pandemic, the country’s Gross Domestic Product (GDP) growth is predicted to fall from 4.8 per cent to 2 per cent this year due to the sharp deterioration in economic activities. Investment in healthcare infrastructure that was in response to rising case numbers is also expected to taper off towards the end of the year, thereby further reducing GDP growth.
As China’s factory activity slows due to its Zero-COVID policy and lockdowns, this also means a decrease in exports and a negative impact on global supply chains. With China contributing to around 26% of global manufacturing output, a spike in global commodity prices is expected. However, this rise in inflation rate is likely to be short-term.
China’s government is currently focused on speeding up vaccination rates, especially for the elderly and vulnerable groups, and has approved trials of home-grown mRNA vaccines, which will put China on a better footing in the fight against COVID-19. Additionally, one reason for the country’s caution with regards to reopening is concern over limited capacity in medical facilities, especially in rural areas. In response, China has been building more modular hospitals both in urban and rural areas in the event of an increase in patients.
Addressing the property bubble
Another challenge facing China’s economy is the slowdown in the real estate sector. China’s property-led growth model can lead to economic instability when the bubble bursts and prices fall. That said, the government is currently working on ways to encourage other investment options such as privately supplied pension savings schemes and hukou reforms. To some extent, property prices in China will need to correct and asset prices should be expected to come down. But there is still some latent demand for housing in China.
Dual circulation and long-term development
Looking beyond the current economic situation to China’s future development, much has been said about China’s domestic-international “dual circulation” strategy, a concept that first surfaced from Chinese policymakers in 2020. Dual circulation aims to reduce the country’s dependency on external markets, in the context of Western efforts to decouple from China. China is understandably concerned about its dependence on other economies for critical supplies, but this does mean that part of the policy is aimed at increasing Chinese resilience rather than promoting trade as such.
However, China does have a strong interest in keeping its economy open more broadly, as demonstrated by its interest in multilateral economic partnerships such as the Regional Comprehensive Economic Partnership (RCEP). The establishment of the RCEP is significant for China as this is the first free trade agreement connecting China to Japan and South Korea. ASEAN is also a regional market and partner that China will continue to readily embrace.
Revitalising the Chinese economy
In the near to medium term, there are various avenues that China can explore to revitalise its economy. In the past, China used mega infrastructure projects as a growth driver. Today, green investments in energy transition could be the next growth driver. Investments in urbanisation will also continue to be crucial, as the urbanisation rate in China is still lower than most developing countries – there is still a great need for urban facilities and services. Educational reforms to equip the population with in-demand skills such as digital literacy can be harnessed.
Ideally, investments in these areas should be undertaken not only by state-owned enterprises but also private entities as healthy levels of competition between private entities is necessary for maximising productivity and profitability for investors. While there is still a great deal of uncertainty, there are reasons to remain optimistic about China’s economy.
