China's road to recovery and resilience

With the lifting of COVID-19 restrictions, the China's economy looks set for a recovery in 2023 — even as global economic growth is projected to slow down amid tightened monetary policies in several advanced economies in response to high inflation.

Economic conditions in many less developed economies are also challenging. Fiscal balance sheets are stretched due to spending on anti-COVID-19 measures, steep rises in public debt, and headwinds from difficult external conditions. Against this backdrop, a stronger Chinese economy is not only beneficial to the country, but also supports global economic recovery.

Reviving consumer demand is key to recovery and growth in China. Pent-up demand from the past three years — when households cut spending during lockdowns — must be unleashed to stimulate new demand for goods and services. A complete revival of consumption might take time as households readjust to post-COVID-19 opening, and there's always the risk of further surges in infections. But a revival must be pursued nonetheless, as consumption is key to sustainable long-term economic growth in China.

Higher consumption will benefit the services sector amid a structural economic shift that will see this sector replace infrastructure investment and manufacturing as the fulcrum of China's economic growth in the coming decades. This shift will drive growth across a host of business sectors including wholesale and retail trade, transportation, travel and logistics, as well as in education, eldercare, health, information technology and hospitality.

This is not to say that continued public and private investments in infrastructure and manufacturing are not needed; they are, particularly to support growth in the immediate and the short term. The government's efforts to loosen housing market policies, and the intent to streamline regulations for private businesses and reform State-owned enterprises, are also critical to recovery prospects.

But only a vibrant services sector can drive longer-term growth. It's also important from a perspective of combating climate change, as service businesses are generally less energy-intensive than construction and industry. Consequently, a greater policy emphasis on developing services can help China make progress on sustainable growth while achieving its decarbonization and climate change targets.

Three specific policy interventions can instigate sustainable longer-term growth in China that will benefit the Chinese people while helping spur global prosperity.

The first step is to introduce policies that strengthen the demand side of the economy, especially household consumption. In line with China's vision of "common prosperity," we suggest a focus on redistribution through progressive taxation and social transfers. This will not only boost household demand, particularly among lower-income groups with higher propensities to consume, but also reduce income inequality.

Households will also consume more if they have better access to better quality public services for health emergencies, social protection for the aging population and the unemployed, and education for their children. All these public goods will ease the perceived need to shore up money for a rainy day.

The second entry point is to provide public policy support for the services sector on the same level as industry, including through tax incentives, access to credit, and competition.

While State-owned enterprise reforms have expanded the role of the private sector in manufacturing, many services are still provided by these enterprises, which are sometimes protected from private competition. Supporting the service sector's development will also mean opening more sectors to foreign direct investment to diversify the scope and quality of services provided.

Finally, China needs to prepare for rapid demographic aging that will increasingly curb economic growth. For the first time in 60 years, China's population fell in 2022 as the birth rate dropped to a record low. Though economic uncertainties might have contributed to this, the underlying causes include rising per capita incomes, high housing prices in cities, and insufficient support for families facing high child-rearing costs.

An aging population can inhibit growth and demand higher social expenditure and pension payments, which limit fiscal space for other important public expenditure. Policy measures are also needed to mitigate the impact of demographic aging on the labor force.

These measures could include increasing the retirement age, improving occupational healthcare so people can work longer, raising the female workforce participation rate through accessible childcare and flexible work hours, and increasing labor mobility by further relaxing the hukou (household registration) system.

The end of the lockdowns is an opportunity to consolidate consumption and services as the prime movers of the Chinese economy. By seizing this moment, China's economic recovery can deliver long-term prosperity and resilience at home and abroad.

Safdar Parvez is the country director, and Dominik Peschel is the former head of the Economics Unit, Asian Development Bank in China.

The views expressed are those of the authors and do not necessarily reflect the views of the Asian Development Bank or China Daily.

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