On June 22, 2019, China Macroeconomic Forum (Mid 2019) with the theme of “China’s resilient macroeconomy under external shocks” was successfully held at RUC. The conference was jointly hosted by the National Academy of Development and Strategy (NADS), the School of Economics of Renmin University of China (RUC), and China Chengxin International Credit Rating Co., Ltd.
Cao Yuanzheng, Chairman of BOCI Research Company, Bi Jiyao, Vice President of the Chinese Academy of Macroeconomics Research, Zhang Ping, Deputy Head of China Social Science College at Chinese Academy of Social Sciences, Liu Yuanchun, Vice President of Renmin University of China, Yang Ruilong, Dean of School of Economics at RUC, Liu Fengliang, Executive Deputy Dean of the Graduate School at RUC, Wang Jinbin, Deputy Dean of School of Economics at RUC, Chen Yanbin, Director of National Economics Textbooks Research Center at RUC and many experts attended the conference.
Yu Ze, research fellow of NADS and professor at School of Economics, presented the main report on behalf of the research group.
According to the report, the first half of 2019 witnesses a weak stabilizing Chinese macro economy. The demand-side data show that the largest contribution to the macroeconomic margin in the first half of 2019 was net exports, lifting up 1.46 percentage points in Q1 2019 compared with downward 0.6 percentage points and making GDP changed by 2 percentage points. The trade surplus continued to rise from January to May. At the same time, the continued high-level real estate investment and gradual recovery of infrastructure investment offset the decline of manufacturing investment, thus the overall investment was stabilized. The supply-side data show that the most significant change is the speed up of added value in financial industry, which help stabilized the growth of service industry. Faced with unfavorable trade picture and downward pressure on global economy, China has effectively stabilized exports and foreign investment by accelerating economic reform and conducting elastic monetary policy and positive fiscal policy. However, the domestic market base behind the weak stabilizing economy is still not solid.
Looking forward to the second half year, unforeseen stimulus factors can’t be counted on. As the marginal effect of supportive policies wanes, the benefits of reform still takes time to show, coupled with insufficient domestic market demand, China’s macro economy will still be under structural downward pressure.
In the short run, the biggest shock to China’s macro economy is from the changes of international trade and financial conditions. We should figure out the root cause and find reasonable countermeasures. Since 2018, the United States has unilaterally raised tariffs on China, and a careful analysis of the scope and content of the tariffs reveals that the US are targeting at the intermediate inputs and capital goods. The tariffs are not merely bargaining tools for the US but also a political-driven decision aiming to restructuring the global value chains and creating more value for the low-and middle-income white community. In addition, the wave of anti-globalization has emerged around the world, however, the world has been closely connected and will continue to be integrated by digital globalization, isolation of any economy is impossible. The China-US trade war is more likely moving toward the “decoupling of science and technology” in the name of national security, being unable to achieve “economic decoupling”.
Despite the challenges, China’s economy is resilient enough to resist various uncertainties. 1. China’s domestic market has huge growth potential; 2. China has built a foundation for R&D-based industrial system; 3. China has advantages in digital economy; 4. The Belt and Road Initiative is inclusive, good for solving the problems of globalization; 5. Market reform will improve the resource allocation and efficiency; 6. An increasingly mature system of macroeconomic control system can better cope with various shocks.
Several short-term risks in the next half year to the Chinese economy should be given more attention: 1. the world economy continues to weaken as international trade and investment are dragged down by the uncertainties; 2. local governments’ fiscal condition might become worsen; 3. the change of sentiment in financial market under pressures of global assets allocation and foreign exchange impact; 4. The new economic industries such as internet and new-tech industry gradually returns to normal status and the bubbles disappear; 5. A further decline of service industry as exports shrinks and manufacturing reduces; 6. Overall employment is still relatively stable but the quality is lowering, which will limit domestic demand; 7. The structural decline of domestic market such as the real estate, automobile.
Based on the above analysis, the research group made a forecast on China’s macro economy in the next half year using the China macroeconomic analysis and forecast model developed by RUC, and the predictions are as follows:
First, China’s macro economy in the first half of 2019 maintained weak stability, the real GDP growth rate is expected to be 6.3%, down 0.3 percentage points from that of 2018. Meanwhile, as the GDP deflator index fell to 1.3%, nominal GDP growth rate at 7.6%, a sharp drop of 1.9 percentage points from 2018, the short-term downward pressure on China’s economy will be greater.
Second, the downward pressure in the second half of 2019 will continue to grow, so the prediction on the real GDP growth rate of the whole year will be 6.1%, down 0.5 percentage points from 2018. The GDP deflator index will fall to 1.5%, nominal GDP growth rate will be 7.6%, a sharp drop of 1.9 percentage points from 2018. Investment growth rate is estimated to be 6.0% in 2019, consumption growth rate expected of 8.2%, exports growth rate under deteriorated international context will be down to minus 2%, imports growth rate minus 4%, the overall trade surplus will be 386.6 billion dollars. It’s estimated that the CPI will increase by 2.2%, PPI up 0.5%, GDP deflator index will increase by 1.5% in 2019.
The report made a series of policy recommendations accordingly:
First, the driving force of Sino-US trade friction is the domestic political issues in the United States. Problems in the manufacturing and other industries will continue to exist in the long run, and gradually amplified as the presidential election approaches. Therefore, China must actively prepare for it this year and in 2020, knowing that the friction won’t end with the election in the future.
Second, China must have a clearer understanding of the future of globalization, and can’t simply analyze it from the perspective of economics. On one hand, the economic motivating factors for globalization are still there, so the global economy won’t be decoupled. China must further promote opening-up. On the other hand, China must be prepared to handle the impacts of other countries’ domestic political issues, focusing on study of individual nations. Meanwhile, China should actively promote WTO reform, the Belt and Road Initiative and other multilateral projects in order to build a more inclusive international community and mitigate the negative impact.
Third, the future global value chains are supported by high-tech knowledge, research and development and big data, thus industrial policies must be targeted with the goals of reducing costs and improving weak sectors. There is no need to worry that rising wages would drive factories out since the labor-intensive value chains are declining. More importantly, China should establish necessary wage adjustment mechanism to increase the real wage based on productivity, not just nominal wage.
Fourth, to further tap the potential of the Chinese economy, we must deepen the supply-side structural reform. As both the internal and external environment change to the hostile direction, Chinese economic structure will inevitable be adjusted accordingly. However, there are still many obstacles to hinder structural reform.
Fifth, in the process of top designing short-term policies, we must take into consideration of the long-turn requirements of reform and opening-up so the current policy will better match up with China’s future macro-economic regulatory and control framework.
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