China to accelerate recovery in 2023

Economic forecasting often is not forecasting, but a projection based on what is happening today. This is what has happened to several recent forecasts about China's economy. The latest among them is a research result reported by Nikkei on Weibo, which says that due to COVID-19, China's GDP will not catch up with that of the United States for an indefinite period.

This conclusion resonates with former US secretary of treasury Larry Summers' pessimistic views about China in a Bloomberg interview in August 2022. In that interview, Summers likened today's China to Japan in 1990 when many people believed Japan would overtake the US in economic size.

But Summers' analogy is wrong — China's population is more than four times that of the US whereas Japan's population in 1990 was only one-third of the US'. It was wrong indeed to believe Japan would overtake the US in total GDP because that would require Japan to have three times the US' per capita income.

As for China, suffice it to say that it needs to increase its per capita income to one quarter of the US', a target that is by no means unachievable for China.

The most important aspect of a country's growth prospects is its potential growth rate. For mature economies, a good estimate of their potential growth rate is their rate of technological progress (total factor productivity, or TFP) plus their population growth rate. It is widely agreed that the US economy's potential growth rate is about 2.2 percent a year. For countries, such as China, moving toward the international technological frontiers, their potential growth rate depends on the rate of capital accumulation as well as the rate of technological progress.

China's savings still account for 45 percent of its national GDP while its stock of net capital in the production sector is 3.6 times of GDP. Assuming all savings are being converted into capital, China's capital stock would grow by 12.5 percent a year.

Also, China's capital stock is relatively young, with a reasonable yearly depreciation rate of 5 percent. As a result, productive capital would grow by 7.5 percent a year in net terms. And since capital makes up half of the production, it would translate into 3.75 percent in GDP growth.

China's TFP growth has been the subject of many past and ongoing debates. But since most of the TFP measures are derived from the so-called Solow residuals which are highly pro-cyclical, many researchers have come up with very small or even negative TFP growth rates for China in the last decade — at a time when its economy had substantially slowed down.

Even so, the lower bound for the share of TFP growth in China's potential growth rate is 20 percent, and the upper 40 percent. If we use 3.75 percent as the basis, China's potential growth rate would vary from 4.7 percent to 6.3 percent, with the average being 5.5 percent.

Will China be able to reach the potential growth rate of 5.5 percent in 2023? This very much depends on the normalization of China's anti-pandemic policy. For the most part of 2022, China effectively contained the spread of the novel coronavirus, but paid a heavy economic price for that, as consumption growth has been sluggish, moving into negative territory in recent months. And since consumption accounts for more than 65 percent of China's GDP, sluggish consumption growth has become a big drag on GDP growth.

But thanks to the latest central government's decision, most Chinese cities have lifted their stringent anti-pandemic policies. This has caused the number of infected cases to soar, although the number of severe cases has been surprisingly low.

However, given the current trend, most cities will likely experience peak infection before Spring Festival (Jan 22), after which infections will start declining. Hence, life is expected to return to normal in most parts of the country during the spring of 2023.

Yet most cities will have to bear the aftermath shocks of the pandemic in the first quarter. As such, fast growth can be achieved only in the second quarter when social and economic life returns to normal. The second quarter will also benefit from a low-basis effect because the second quarter of 2022 registered almost no growth.

Also, government policy will be accommodating in accordance with the encouraging signals sent out by the recently concluded economic conference. While fiscal expansion will continue, monetary policy will be contingent on the growth trajectory. The most encouraging development is that the housing market has picked up, and will again become one of the strongest drivers of recovery. After a year of decline, the sector will probably resume growth in 2023.

Adding up all the factors, 5.5 percent growth in 2023 is an achievable target. In fact, if China is able to make up for the growth shortfalls of 2022 — growth for whole of this year will probably be 3-3.5 percent, 1.5-2 percentage points lower than the potential growth rate — even 7-7.5 percent growth would be reachable.

The author is a liberal arts chair professor at the National School of Development, Peking University. The views don't necessarily reflect those of China Daily.

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