(Yicai Global) April 19 -- The Covid-19 outbreaks in and around Shanghai since early March are likely to dampen China’s gross domestic product growth in the second quarter, making it hard for the country to achieve its target of 5.5 percent economic growth this year. I therefore call on the government to loosen macroeconomic policies as soon as possible.

China’s economy grew at a faster pace than expected in the three months ended March 31, expanding 4.8 percent from a year earlier and 1.3 percent from the previous quarter, according to data published by the National Bureau of Statistics yesterday.

Personal consumption expenditure contributed 3.3 percentage points to GDP growth in the first quarter, down from 3.4 percentage points in last year’s fourth quarter. The growth driven by investment expanded to 1.3 percentage point from minus 0.5 percentage point, while that of the net export of commodities and services narrowed to 0.2 percentage point from the previous 1.1 percentage point.

This indicates that the rebound in economic growth at the start of the year is largely due to a jump in investment while exports, which stayed strong for the past two years, have started to slow.

Retail sales of consumer goods soared 6.7 percent in January and February from the same period last year, much higher than last December’s 1.7 percent. But they plunged 3.5 percent year on year in March as the latest round of Covid-19 outbreaks hammered consumer confidence.

Fixed-asset investment expanded 12.2 percent in January and February year on year, but growth for the first three months narrowed to 9.3 percent. This is still much higher than last year’s 4.9 percent. In March alone, investment in the manufacturing sector, realty market and infrastructure surged 15.6 percent, 0.7 percent and 8.5 percent respectively from March last year.

Investment in infrastructure has expanded greatly this year and this is closely related to the early execution of the central government’s 2022 fiscal policy and the local governments’ acceleration of investment. Investment in the real estate sector continues to shrink, while that in the manufacturing industry is generally stable.

Last month, the purchasing managers’ indexes for both the manufacturing and services sectors dropped below the benchmark of 50, indicating contraction, at 49.5 and 48.4, respectively. The last time that both PMIs were in negative territory was in February 2020, a period greatly impacted by the Covid-19 pandemic. As a leading economic indicator, this means that China’s factory output and service sector performance will not be rosy in the second quarter.

Exports jumped 14.7 percent in March from the year before, while imports dipped 0.1 percent, both significantly lower than the average growth rates of the past two years, indicating that the ongoing Covid-19 pandemic and geopolitical tensions have greatly impacted China’s importing ability. And the new export orders sub-index slumped to 47.2 in March from 49 in February, so the outlook for growth in exports is also not good.

Better Support

The government should relax macro policies as soon as possible. The Covid-19 outbreaks in the Yangtze River Delta region, which encompasses Shanghai and parts of Jiangsu, Zhejiang and Anhui province, and the resulting lockdowns have been paralyzing the region for over a month, resulting in the disappointing macro data for March.

The central government should raise the proportion of the central fiscal deficit to GDP to 3 percent or 3.2 percent from the current 2.8 percent and issue special treasury bonds in large quantities to support the construction of national-level projects as well as subsidize small and medium-sized companies that have been badly impacted by the pandemic. Financing thresholds should also be appropriately relaxed.

The People’s Bank of China should continue to cut the reserve requirement ratio for banks, on top of the recent 25-basis-points reduction, and slash interest rates.

The PBOC should tolerate the devaluation of the Chinese yuan against the US Dollar to a rate of about 6.6 or 6.7 so as to make room for the rate cut, as the yield spread between the 10-year treasury bonds of China and the US has now been reversed. In addition, the central bank should implement counter-cyclical and macro-prudential regulatory policies, to suitably relax the restrictions on commercial banks’ issuing credit.

The government should avoid implementing monetary tightening policies as much as possible and try to relax policies targeting certain sectors including real estate.

(The author is the deputy head of the Institute of Finance and Banking at the Chinese Academy of Social Sciences and the deputy director of the National Institution for Finance and Development)

Editors: Liao Shumin, Kim Taylor