An aerial photo shows the busy Lianyungang port, Jiangsu Province. From January to July, Jiangsu Province recorded a total import and export volume of 2.93 trillion yuan, accounting for 12.4% of China’s total volume of imports and exports in the same period. Photo: CFP

At a time when the world is undergoing profound changes unseen in a century, the Chinese economy has emerged on top, achieving historic success and maintaining the two wonders of rapid economic development and long-term social stability. In 2023, the Chinese economy has continued to show great resilience and potential for development. On the one hand, we should celebrate this positive trend in economic recovery — while staying focused and remaining confident. On the other hand, we should soberly assess the challenges and pressures ahead, and remain mindful of potential risks in an uncertain future.

Positive trends

In the first half of 2023, China’s economy — as a whole — showed good recovery momentum. Rising market demand, an optimized economic structure, and stabilization of employment and prices all contributed to high-quality economic development. 

From the perspective of economic growth, China’s gross domestic product (GDP) was 59,303.4 billion yuan in the first half of 2023, an increase of 5.5%. This percentage is significantly higher than the 3% economic growth of 2022, and much higher than the economic growth of other major economies in the world. Meanwhile, global economic recovery is weak and experiencing considerable downward pressure, particularly in developed economies. Economic growth in the United States has slowed to a crawl and lacks momentum.

China’s efforts to optimize its economic structure has yielded positive results. First, investment in innovation has increased. In the first half of 2023, investment in high-tech industries rose by 12.5% year-on-year, significantly faster than overall investment growth. Meanwhile, investment in emerging and green sectors grew rapidly, and investment in clean power increased by 40.5% year-on-year. 

In addition, innovation is gaining momentum. Modern information technology, AI, big data, and other technologies have become increasingly widespread. New industries and new products are booming, and scientific and technological innovation has been empowered and enhanced. In the first half of 2023, the added value of China’s above-scale aerospace and equipment manufacturing industry, as well as the lithium-ion battery manufacturing industry, increased by more than 20% year-on-year. The value added by information transmission, software development, and information technology services also recorded double-digit growth. 

China’s industrial structure has also witnessed ongoing improvements. In the first half of 2023, the added value of China’s service industry accounted for 56% of the GDP, and its contribution rate to economic growth continued its upward trend. The industrial structure has seen continuous optimization, green transformation and high-quality development have been steadily advanced, and the real economy, characterized by a long industrial chain and high technological content, continues to play an essential supporting role.

Several factors indicate market demand is on the rise. First, overall consumption has shown a relatively rapid recovery. In the first half of 2023, the total retail sales of consumer goods in China increased by 8.2% year-on-year, propelling the consumption growth rate to join the top rankings after falling to the bottom among three drivers of growth — consumption, exports, and investment. Second, the scale of effective investment continued to expand, further enhancing its central role in optimizing the supply structure. Infrastructure and manufacturing investment remain the primary driving forces behind this trend. In the first half of 2023, China’s fixed asset investment grew by 3.8%, of which infrastructure investment and manufacturing investment increased by 7.2% and 6% respectively, and the contribution rate of fixed asset investment increased steadily. Third, although exports fluctuated, the potential for growth remains large, and the quality of internationally circulated products is constantly improving. China still has the advantage of a complete range of manufacturing sectors and talent dividends, so the basic level of foreign trade remains fundamental to sustaining economic growth.

Employment and prices were generally stable throughout China. First of all, the national urban unemployment rate in the first half of 2023 continued to drop from 5.6% in February to 5.2% in June. The unemployment rate in 31 major cities fell from 5.7% in February, to 5.5% from March to May, indicating stable employment. Per capita disposable income grew by 5.8% in real terms, significantly faster than in all of 2022. In addition, prices have remained relatively stable, showing only moderate spikes. Though the increase in the Consumer price Index (CPI) has declined in stages, the broad money supply (M2) and social financing have grown relatively quickly. As the economy recovers, market demand has expanded, as high base factors present during the same period in 2022 have been eliminated. These factors imply that price increases will decline, returning to a reasonable level, and the risk of deflation in the Chinese economy is minimal.

Challenges and pressure

At present, positive trends within the Chinese economy appear stable. However, in the face of overlapping complications, new and old, domestic and international, the path toward high-quality economic development is not always likely to be smooth. A calm and objective analysis of these challenges or problems is essential to continue China’s upward economic trajectory.

First, endogenous growth drivers are not necessarily strong enough. Following the international financial crisis, China’s economic growth rate began to slow. From 2008 to 2013, the economic growth rate dropped from 10.56% to 9.14%. From 2014 to 2019, it further decreased to 6.84%. It is forecasted that during the 14th Five-Year Plan period (2021-2025), China’s GDP will maintain an average annual growth rate of about 5%. 

At the same time, the growth rate for labor forces declined significantly, and the growth rate of total factor productivity showed a downward trend. Insufficient domestic demand and weakening external demand are evident. By strengthening export controls and building an alliance system, the United States and other Western countries tightened restrictions on Chinese technology enterprises. These actions complicated the external environment, posing additional challenges for China’s economic development.

Second, initiatives to boost consumer demand have not met expectations. In the short term, the “scarring effect” of the COVID-19 epidemic has led residents to “hold onto their wallets,” resulting in a slow recovery for durable goods consumption and low consumer confidence. 

Third, the expectations of micro entities are not optimistic. Expectations are crucial for high-quality economic development. There are many indications that current expectations are unstable and may continue to weaken. The manufacturing purchasing managers’ index has been in trending downward since February 2023, and remained below the critical point for two consecutive months in April and May. The non-manufacturing business activity index also began to decline month-by-month in March, from 58.2% in March to 54.5% in May. The consumer expectations index fell about 20% in the first quarter from a year earlier and fell -0.41% in March from the previous month. Given increasing uncertainties in the international environment, expectations might plummet further.

Fourth, the recovery of the private economy has not gained sufficient momentum. Private enterprises are experiencing a slow recovery, and the number of private enterprises operating at a loss across the country has continued to rise. As of May 2023, official data indicates there were 99,266 loss-making private industrial enterprises, accounting for 28.1% of the total. Since 2023, the highest decline in private enterprise profits has been about 23%. At the same time, factors that have long restricted development of the private economy have intensified. These include a sharp decrease in foreign trade export orders, increasing industrial chain and supply chain relocation pressure, rising labor costs, and high financing costs.

Targeted fiscal policies

In light of this situation, accurate and effective fiscal policies must be urgently implemented. To begin, China must intensify fiscal policy regulation and make good use of its unparalleled policy space. China’s unique financial system dominated by state-owned capital makes the government debt ratio more resilient. 

Next, we need to focus our efforts on high-quality economic development. This entails optimizing the structure of government spending to enhance support for scientific and technological innovation, education, and talent training. By doing so, we can improve the quality and efficiency of the supply system. At the same time, the payment transfer system from the central government to local governments must play its role in role in coordinating funds to ensure the welfare of the people, safeguarding the minimum standards of the “three guarantees” at the grassroots level, reducing disparities in tax burdens across industries and regions, and furthering the goal of equal access to essential public services..

Third, we need to strengthen the expected management of fiscal policy and policy reserves. In order to guide public expectations and boost confidence, we should comprehensively improve the effectiveness of expectation management for fiscal policy, introduce fiscal policy guidelines (especially for unconventional fiscal policies that directly manage expectations), and enrich the policy toolbox. At the same time, we should better manage the cross-cycle adjustment of macro policies, enhance the cross-cycle review of policy objectives, policy space, policy risks, and policy performance, and focus on guiding the expectations of private enterprises with longer-term and more stable fiscal policies to boost their confidence.

Fourth, we need to improve the macroeconomic governance framework, strengthen counter-cyclical and cross-cyclical fiscal policy adjustments, and maintain policy continuity and credibility. Tax and fee reduction, and other relief policies, should be ensured, optimized, and perfected to help enterprises with solvency issues. In addition, we should make comprehensive use of fiscal and monetary policies to increase financial support and tax incentives for scientific and technological innovation for private enterprises, broaden financing channels, and reduce financing costs. We should also improve the supportive function of the social security system and fully leverage the social safety net. We should further deepen reform of the tax system, improve income distribution, and strive to expand the size of the middle-income group.

Fifth, we need to establish a long-term mechanism for coordinating funds and improving their efficient deployment. We should coordinate the central budget, local budget, state capital operation budget, and the social security fund budget to establish a mechanism which coordinates government funds across departments. Evaluation mechanisms also need an update, from past financial evaluation methods to practical evaluation, taking into account public satisfaction. A financial sustainability assessment framework at all levels should be in place, along with a sound legal system, comprehensive coverage, and an intelligent and efficient performance indicator system. We need to build a full-fledged review and oversight mechanism for budgets and final accounts, establish a pre-review mechanism for regular public review of budgets, improve an on-the-job early warning system to monitor both the progress of budget implementation and the achievement of performance targets, and strengthen the post-monitoring system for linking budget reviews and audit oversight.

Finally, we should effectively guard against and defuse local debt risks. It is necessary to increase the fiscal deficit ratio and strengthen fiscal policy regulation, but this does not mean that there will be no risks. In 2022, China’s local government debt rate reached 551.7%, exceeding the internationally recognized warning line of 120%. Therefore, we should strengthen the management of government debt, formulate and implement a package plan to reduce local debt as soon as possible, and secure the bottom line of fiscal security.

Ma Haitao is president of the Central University of Finance and Economics, and a professor at the University.

Edited by YANG XUE