Consumption key to sound growth this year

Chinese financial markets are seen making more positive news headlines of late, reflecting improving confidence in the sector and economic recovery. Foreign investors have also shown stronger sentiment toward China's economy, as evidenced by the continuous inflow of money through the stock connect programs.

We are also optimistic about China's GDP performance this year. A growth target of 5 percent, as we see, is achievable, if sought with good efforts and skill. With the external demand's driving force expected to weaken this year due to many global uncertainties, exports may experience a process of downward adjustment. Domestic demand, which has been highlighted by many key meetings, will undoubtedly be a major growth driver for China this year.

What we think about most in terms of this issue, which is also a hot topic among economic experts at present, is whether investment or consumption is the better driver for China to boost domestic demand this year.

The answer for us is consumption. However, boosting consumer confidence is a major task. Why? Let's first take a look at fixed-asset investment, which has been a key growth driver for China, especially last year.

Investment woes lingering

The first pillar for the sector is infrastructure investment. The growth rate of infrastructure investment last year was already quite strong. With policy support, the 2022 nominal growth rate of infrastructure investment reached some 10 percent. On this basis, greater support will be needed to stabilize or increase the growth rate of infrastructure investment this year, which is quite difficult.

The second pillar is real estate investment, whose performance this year may see a recovery supported by policies stronger than in previous years. But the sector will not be strong enough to energize the nation's economic growth.

The third pillar is investment in manufacturing. The utilization rate of manufacturing capacity in 2022 was 1.9 percentage points lower than that in 2021, reflecting a certain amount of idle capacity in the sector. In addition, industries that have seen rising or relatively stable capacity utilization rates are mostly upstream ones, such as mining, oil and gas, and other energy commodity industries. Excluding the driving force of these industries, the utilization rate of the remaining manufacturing capacity is even lower.

Generally speaking, there are two unfavorable factors hindering the growth of manufacturing investment in 2023: a relatively low production capacity utilization in manufacturing; and external demand being unpromising. The development of the sector will thus depend largely on the rebound in domestic consumption and the performance of infrastructure and real estate. Considering the outstanding performance and a high base in 2022, manufacturing investment will be supported by a rebound in domestic demand, but also face challenges brought by the weakening external demand and decline in capacity utilization.

Looking at consumer demand, a major challenge over the past three years has been the COVID-19 pandemic, especially in 2022. With a low base last year and the current optimized COVID-19 measures, a rebound in consumption in 2023 is worth looking forward to and is likely to become the main driving force for economic recovery this year.

Referring to consumption, we believe that confidence and employment figures are the most direct factors conducive to China's consumption. Based on major employment channels, we can divide this issue into two categories for analysis — the employment and confidence of government employees, and those of employees serving market entities, especially private enterprises.

Stronger confidence key

In the past three years, due to the joint influence of revenue and expenditure, the fiscal balances of some local governments have decreased, which affects government workers' incomes. It should be noted that incomes of such employees in each locality are actually a reference baseline in the eyes of local consumer groups. If their income expectations are affected, consumer confidence of other social groups will also be affected.

The solution to this issue lies in improving local fiscal situations. However, it is difficult for real estate income and land transfer fees to improve significantly over a short period in the current year, so local governments should activate economic vitality through stronger policies in a timely manner. On the other hand, it is necessary to speed up the disposal of local government debt to render local financial situations healthier.

Apart from keeping an eye on the impact of local government debt problems leading to financial risks, the government should also be aware that a poor fiscal condition may have an impact on the recovery of consumer demand and economic recovery. With the optimization of COVID-19 containment measures, it is necessary to repair consumer economic cycles and enhance market vitality to significantly improve tax resources and the financial situations of local governments.

When it comes to consumers working in market entities, especially private enterprises, there are several challenges worthy of attention.

First, the downturn in external demand may have an impact on China's export growth this year. This will have a greater impact on foreign trade-reliant enterprises, which will affect the employment and confidence of their employees.

Second, the market has witnessed many players quitting the market due to the impact of the COVID-19 pandemic, but the allocation of market resources has not been optimized. That's because the vacating of such enterprises was largely not due to mistakes in business decisions or strategies themselves, but noneconomic factors or impacts.

The COVID-19 pandemic has brought challenges to the capital chains of almost all enterprises, but compared with State-owned enterprises, private companies and individual and household business owners are more prone to funding problems. Such market players are more active and flexible, and are key to the employment and confidence of consumers, but they are also more vulnerable under the impact of COVID-19.

To this end, after the shock of a pandemic lasting three years, more efforts should be made to help private enterprises and individual and household business owners, which are the major job providers making up 90 percent of the over 100 million registered market entities nationwide. We must restore the confidence of such market entities as soon as possible, and that of their employees. These employees belong to both the producer group and the consumer group, and the recovery of their confidence will revitalize consumer demand.

Market sentiment repairer

We all know that market sentiment is contagious. In the market, emotion spreads via links such as the interaction between investing enterprises, and the interaction between consumers and enterprises. To this end, the role of the government in boosting market confidence is very important, as either a single consumer or an enterprise barely has the ability to affect the confidence of the overall macroeconomy. The government, however, has such an ability. Compared with major economies, such as Europe, the United States and Japan, China's fiscal and monetary policy space is absolutely larger, which is an advantage for the government to leverage in expanding domestic demand and boosting economic growth this year.

In addition, as consumption and investment can also promote and reinforce each other, policy support that is strong enough must be rolled out in advance in a timely manner at the very stage of restarting economic engines, so that a virtuous circle will be formed to help the nation's economy get back on a healthy growth track.

The views don't necessarily reflect those of China Daily.

The writer is deputy director of the Institute of World Economics and Politics at the Chinese Academy of Social Sciences.