China Recalibrates Economic Recovery Plans

An analysis by Michael Lelyveld
China Recalibrates Economic Recovery Plans Chinese 100 yuan notes are shown in a Jan. 14, 2020 photo.

After years of promoting rapid economic growth, China's government is facing a far more complicated task for recovery this year.

The record-shattering 18.3-percent growth rate in the first quarter from a year earlier should have been enough to convince analysts and the government that China had overcome the COVID-19 crisis and achieved a recovery.

But many reviews of the performance were mixed, noting that the growth was magnified by comparison with the record 6.8-percent slump from a year before during the COVID-19 lockdown.

Even with that, the double-digit gain in the gross domestic product announced by the National Bureau of Statistics (NBS) fell short of the 19 percent predicted by analysts in a Reuters poll.

More troubling were signs that the trajectory of the recovery had already started to sag, as first-quarter growth edged up only 0.6 percent from the fourth quarter of last year, slowing from a third-quarter rise of 3.2 percent, according to the NBS.

The quarter-to-quarter GDP increase "marks the slowest growth rate in the past decade, with the exception of the coronavirus-hit first quarter of 2020," said Julian Evans- Pritchard of Capital Economics, The Wall Street Journal reported.

While Evans-Pritchard cited softening in industrial, construction, and service sectors, other analysts saw weakness in retail sales and consumption growth.

Economists at J.P. Morgan trimmed their 2021 forecast for GDP growth to 9.3 percent from 9.5 percent, the Journal said.

Further signs emerge

Further signs of slower growth emerged Friday as the official purchasing managers' index for manufacturing in April fell short of expectations with a reading of 51.1, down from 51.9 in March.

The index for non-manufacturing activity also slipped to 54.9 from 56.3 the month before. Both readings remained above the 50-point mark separating expansion from contraction, but the reports were seen as dragging on growth prospects this year.

Before the NBS quarterly release on April 16, China's economy had been riding a higher wave of expectations.

On April 6, the International Monetary Fund raised its estimate of China's growth for this year to 8.4 percent, up 0.3 percentage points from its previous forecast in January.

The IMF's revised outlook called attention to the unusually cautious stance of the Chinese government with Premier Li Keqiang's more restrained target of "above 6 percent" in his report to the National People's Congress in March.

Li's lower growth goal has been the subject of curiosity and a marked departure from years of NBS cheerleading for higher growth rates.

In comments for the press, NBS spokeswoman Liu Aihua seemed to deliberately throw a wet blanket over China's good news about growth.

"At the same time, we must also see that the COVID-19 epidemic is still spreading globally, the international landscape is complicated and severe, the foundation for domestic economic recovery is not yet solid, and some service industries and small and micro enterprises are still facing more difficulties in their production and operation," Liu said, according to the South China Morning Post.

In its press release for the quarter, the NBS also went out of its way to publish not only year-on-year growth rates but also comparisons to pre-crisis data from 2019 with lower average annual growth numbers over the past two years.

While the headline GDP figure was 18.3 percent for the quarter, growth over the two-year period was only 10.3 percent and average annual growth was just 5 percent, the NBS said. At that rate, growth was actually slower than the 6.1- percent pre-crisis pace for all of 2019.

Softening the numbers

The extra effort to soften the numbers, or to put them in wider context, followed a similar practice in state media reports on economic recovery this year.

On March 15, for example, the official Xinhua news agency reported that retail sales growth for the January-February period jumped 33.8 percent. But that was really only 6.4 percent above the comparable pre-pandemic period of 2019, and only a 3.2-percent average annual growth rate over two years, Xinhua said.

Similarly, the NBS reported that industrial output climbed 24.5 percent from a year earlier in the first quarter, but production rose only 2.01 percent from last year's fourth quarter, said the government's data gatherers.

There are several possible reasons for this new NBS practice of reporting lower growth numbers, beyond the implication that a lower GDP bar will make it easier for the government to exceed its growth goals.

First, the government continues to see weak spots in the recovery, making it uncomfortable with the higher IMF forecasts in the Communist Party's showcase centenary year.

References to President Xi Jinping's "dual circulation" strategic theory of economic growth have been noticeably absent from the current NBS reporting in a sign that consumption has not lived up to its official billing.

Last Sunday, the Ministry of Commerce announced that it would launch its annual "national consumption promotion month" on May 1, offering coupons and subsidies to shoppers in hopes of convincing them to spend.

Sporadic outbreaks of COVID-19 at home and uncertainty over the pandemic abroad have not encouraged China's wary consumers.

The IMF's outlook has also been mixed, raising China's growth forecast while voicing misgivings about plans for gradual tightening of support for the economy this year at the same time.

"To consolidate growth, China should avoid premature withdrawal of fiscal support, and should phase out special financial support and strengthen regulation once growth is on a firm footing," said the IMF's China mission chief Helger Berger in an interview with the party's flagship paper People's Daily.

Balancing the risk

On April 19, the National Development and Reform Commission (NDRC) indicated that the top planning agency has similar concerns.

"China will maintain necessary support for economic recovery and implement targeted structural tax cuts and other measures to consolidate its growth momentum," said NDRC spokesman Meng Wei in a Xinhua report.

The planners appear to be less worried about growth than financial risk, but the challenge may be to find where the balance of risk lies.

"The economy is expected to slow gradually over the course of the year, but at what pace will depend on Beijing's withdrawal of economic support to focus on debt," the Morning Post said.

Faster growth also raises pressure for higher prices of energy and commodities at a time when climate pledges are calling out for emissions cuts, particularly from coal.

As the statistical dust from the pandemic settles, China's economy seems destined to resume its pattern of declining growth rates.

As growth slows, the NDRC and the NBS are likely to feel rising pressure to pick up the pace. That's when the current practice of reporting lower quarter-to-quarter and two-year numbers may come into play.

Derek Scissors, an Asia economist and resident scholar at the American Enterprise Institute in Washington, expressed surprise that the NBS had publicized the 18.3-percent year- on-year growth rate as its headline number because it will lead to inevitable pressure when the growth rate declines.

"It's unavoidably going to crash over the course of the year, and the party hates even the appearance of instability," Scissors said.

But the lower quarterly and two-year figures may help the government to tell a more positive growth story.

"The quarter-on-quarter and two-year figures are being promoted now in order to be used later, when they show steady gains while China's conventional growth number plunges," Scissors said.


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