Pulling Two Levers for Economic Growth
Jul 27-2022
Two major causes accounted for the plunge in China’s economic growth in the first half of 2022, namely stringent pandemic control and miserable performance of the real estate industry, said Prof. Yao Yang, Dean of the NSD, in the 159th edition of Langrun Policy Talk.
Expanding by 4.8% in the first quarter, the Chinese economy plodded along with 0.4% growth in the second. To achieve the 5.5% annual growth target, the economy would have to expand by 8% in the second half of the year, a tall task as it would greatly exceed the economy’s potential growth rate, said Prof. Yao. He believed that even more important than hitting the target is achieving steady recovery in line with the growth potential growth of 6%, which won’t be a smooth sail either.
China’s dynamic-zero COVID policy proved highly effective in 2020; as a result, its economy registered impressive recovery from May 2020 to the first half of 2021. This year, with the extremely contagious Omicron variant have come even stricter prevention measures, which have greatly dampened consumption, said Prof. Yao.
The COVID preventive mechanism must be adjusted to be effective and accommodate long-term needs, owing to the fact that the virus will never be fully eradicated. Prof. Yao offered several suggestions, including changing the policy of “ensuring zero COVID in the society” to “ensuring zero COVID with regard to people in economic activities,” improving the precision of case monitoring, abolishing the practice of transporting people to another city for quarantine, and unifying COVID codes and policies nationwide.
As for the real estate, Prof. Yao noted that the top 100 largest firms in the industry saw their combined sales nose-dive by 51% in the first half of the year, causing a big dent to economic growth as the industry and those related to it (such as furnishing and appliances) were reckoned to contribute up to 17% of national GDP previously. The major cause of such an unprecedented drop, according to Prof. Yao, is the “Three Red Lines” policy, which was rolled out to rein in an industry on too much borrowing. Prof. Yao called for putting realty credit in the right perspective as high debt ratio is an idiosyncrasy of the industry, especially in China. He urged rectifying the policy. The first red line requires realty firms to have a debt ratio no higher than 70% after taking out pre-sale revenues; Prof. Yao advocated giving a grace period for the firms to work out the issue. The other red line demands the firms to have a cash-to-short-term-debt ratio of no lower than one, which Prof. Yao found perplexing, for a big cash pile would normally preclude the need of borrowing.
