Structural reforms in private consumption are necessary for a further rebound in the Chinese economy
Overall, some economic international organizations forecast that China’s economy may rebound to around 4-5% in 2023, and even better next year. They noted, however, that the economic forecasts are subject to significant uncertainties both within and outside the Chinese economy, including youth unemployment, an aging population, and geopolitical conflict between the United States and China. The International Monetary Fund and the Asian Development Bank have released reports recommending some structural reforms that the Chinese government can consider in its economic rebalancing (Asian Development Bank, 2023; International Monetary Fund, 2023).
Compared with advanced economies that generally practice quantitative tightening, the Chinese government implemented fairly loose fiscal and monetary policies last year, offering some tax cuts and credit provision to small and medium enterprises. After a long period of massive investment in public infrastructure, the fiscal multiplier is no longer as large as it used to be.
Figure 1 shows that whenever a black swan event such as a new wave of new variants of Covid-19 spreads again, private consumption will be hit the hardest this year. Reduced private consumption in other countries (Figure 2) would also likely lead to lower demand for China’s exports.
Household spending has continued to become more cautious, driving up more household savings for precautionary purpose, even after the long-standing zero-covid policy has been lifted late last year. Along with youth unemployment rate of as high as 20%, this remarks that policymakers should always prioritize household income over securing employment and overall economic growth.
References
Asian Development Outlook April 2023. Asian Development Bank. Downloadable from https://www.adb.org/publications/asian-development-outlook-april-2023 on 2023.06.04
World Economic Outlook: A Rocky Recovery April 2023. International Monetary Fund. Downloadable from https://www.imf.org/en/Publications/WEO/Issues/2023/04/11/world-economic-outlook-april-2023 on 2023.06.04