Vice-Minister for Foreign Affairs

During the first quarter of this year, the country’s economic recovery improved, the consumer markets rebounded, industrial and service production rebounded and the main real estate indicators narrowed. At the same time, micromarket players still face difficulties, external financial conditions are further complicated, and domestic efforts to prevent major risks remain daunting. The 50-member Forum on Wealth Management in China (CWM50), based on discussions held in front of the organization of relevant sectoral leaders, expert scholars and representatives of market subjects, studied the “Introduction Report on the Macroeconomic Situation in the First Quarter of 2023” and held in Nanjing in recent years the “Preparation of the Analytical Report on the Macroeconomic Situation in the First quarter of 2023”. Mr. Banven, Chief Economist, Research Department, Director of the Institute of Central Treasury, took part and made a presentation.

Preven believe that post-infection recovery and the general economic cycle are different, affecting short-term cycle characteristics and having long-term structural implications. First, from a cyclical perspective, post-infestation recovery and traditional economic cycles are characterized by precipitation of consumption, with an autonomous rebounding character; and secondly, structurally, two traditional problems have increased: The first is the income gap, the debt problem, and the third, the need to combine cycles and structures in thinking about macro-policies, which requires a shift from investment to consumption, from finance to finance.

Corrigendum

Let me briefly comment on three aspects: first, periodicity, second, structure, and third, how to combine cycles and structures from a macro-policy perspective.

The epidemic is a fundamental background of the current economic situation, with post-communicable recovery and the general economic cycle, which has an impact on the characteristics of the short-term economic cycle and has a long-term structural impact. This paper will therefore be based on the two perspectives of the cycle and structure.

First, from a cyclical perspective, post-communicable recovery is different from the traditional economic cycle. Traditional economic cycles are generally investment-driven or investment-driven, consumption is relatively stable and consumption cycles are not marked. Investment activities are per se procyclical, but both in China and in developed countries, investment plus banks are important vehicles for countercyclical regulation, such as local government investment infrastructure development. Thus, the previous cycle was characterized by increased investment, driven by monetary or fiscal policy relaxation, leading to higher employment, higher incomes and higher consumption, followed by inflation and rising prices, leading to a policy contraction, which was the order of the traditional cycle. But there is a different economic cycle of recovery and tradition, where consumption begins. Consumption was physically and artificially restricted during the epidemic; consumption was self-sustaining as the disease became more restricted. Therefore, this cycle of economic recovery is manifested in consumer-led investment, leading employment, income, consumption and prices. The economy of the United States was more resilient because of the recovery of consumption in the second phase of the United States economic cycle. The recovery in consumption after the first phase of the Chinese economy is marked by a clear pattern — self-propelled rebound, service recovery is the main vehicle, mainly from post-commissure travel and the consumption of rebounds in the catering services sector.

Reflecting on the high degree of sustainability of economic recovery, it would revert to issues related to investment in traditional economic cycles. At present, the first step in China’s economic recovery is the consumption rebound, but consumption rebounds with income growth, otherwise short-term consumption is unsustainable and income growth requires employment growth. Correspondingly, the rise in employment requires economic dynamism, culminating in traditional economic cycle investments. On the investment side, real estate has a strong procyclical nature and, despite significant improvements in the trading chain, real estate investment in the entity is weak. Real countercyclical features are capital investment and other investments by policy-driven local governments, but the contribution of this sector to the economy is still less than the previous economic cycle. In the medium term, thinking about the sustainability and high level of future recovery still requires a return to the traditional economic cycle.

Secondly, structurally, the epidemic has been exacerbated by two traditional problems. The first is the income gap, with low- and middle-income sectors, especially low-income ones, experiencing slower growth. Three years after the outbreak, the problem has become even more prominent, especially among young people. Low- and middle-income sectors have experienced slower income growth, with greater consumption constraints. In essence, the underlying purpose of investment is consumption, which is further strained by the economic environment as public expectations of future consumption are inadequate.

The second is the debt problem. Over the three years of the epidemic, the debt burden for real estate and even for local governments has increased further. The important measure of our response to the epidemic is credit expansion, which means an increase in debt levels. The faster expansion of credit since this year has helped to alleviate the debt problem, but the overall debt burden remains a constraint on investment and on the sustainability of future economic recovery.

In addition to the two old issues, there is a new problem, namely, the geopolitical shift over the three-year period of the epidemic, manifested in the impact of non-economic factors, industrial chain adjustments and other national policy shifts on Chinese industry. The most fundamental implication of this new problem is that our economy is more dependent on domestic demand, i.e. consumption and investment. The problem of investment is too high a debt burden, and consumption is too slow for low- and middle-income growth, which is a contradiction between the structural problems and cycles of our country.

Thirdly, thinking about macro-policies requires a combination of cycles and structures. Often, communities tend to be oriented towards a cyclical-structuring approach, believing that policies that promote pro-cyclical recovery and short-term growth may be at the expense of medium- and long-term sustainability, such as overdependence on investment drives instead of generating debt. Thus, earlier discussions on traditional economic cycles do not mean that we should return to traditional, long-term sustainability policy models. On the contrary, there are policies that unite cycles of recovery and long-term economic restructuring, which require macro-policies to move from investment to consumption, from finance to finance.

There are several of these aspects, namely, how to balance financial stability, price stability and economic growth. At this stage, the United States has maintained financial stability, but there are inflationary problems that may be a drag on future growth. On the other hand, the slower economic growth in China is not due to inflationary pressures, but is faced with balancing gold.