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China’s GDP Target Reflects Reality And Reason, Not Pessimism
DATE:  Mar 08 2022
/ SOURCE:  Yicai
China’s GDP Target Reflects Reality And Reason, Not Pessimism China’s GDP Target Reflects Reality And Reason, Not Pessimism

(Yicai Global) March 8 -- Last weekend China’s annual "two sessions" gathering commenced which saw the country allocate a GDP growth for the year 2022. This target was revealed to be 5.5%, a modest retraction from the previous year’s 6% in respect to a number of challenges the global economy is facing right now. The western mainstream media branded it “the lowest growth target” in decades, but as such reporting on China’s economy has been persistently negative, it fails to incorporate the bigger picture in a number of areas. Such targets are a worst case, as opposed to a base case scenario, and are planned with realism, empiricism, and honesty regarding the country’s internal and external situations as opposed to idealism or optimism.

This goal has been set in consideration of an external environment that faces many unprecedented challenges. The year 2022 has, contrary to hopes, not been the year the “world turns back to normal”- as an exit from covid related disruption comes, it has instead been replaced with a worst-case scenario regarding the situation in Ukraine. This poses a number of global economic consequences. First of all, global energy prices in both oil and natural gas have surged to unprecedented highs. Secondly, commodity costs in key metals have also soared, facilitating renewed supply chain disruption, as well as agricultural products such as wheat. Thirdly, the conflict has tanked global markets and sent many as of March 8th, into “bear” territory. In a nutshell, the events in Ukraine are a sledgehammer to global economic stability and investor confidence, which will cause considerable damage to economies in Europe.

These challenges come amidst a domestic situation in China which is seeing the covid-19 recovery trajectory flatten, along with challenges posed by real estate. China’s success in 2020 and 2021 came amidst a sustained export boom, but consumption growth has dragged behind which has led to growing debate on the longevity of the current zero-covid approach. Even without considering the events in Europe, this year was naturally anticipated by economists to see such a boom soften and for China’s GDP to grow less, with the national target largely being in line with economists’ forecasts of 5-5.5%.

Given all this, it has been largely anticipated that in order to meet this target China’s own monetary policies will change to meet the challenges at hand, unleashing a policy tool that has been kept in reservation whilst western countries are forced towards fiscal tightening. This will include lowering interest rates, increasing benchmark lending, and potentially investing more stimulus into the economy, which will manifest in greater infrastructure investment nationwide. This arguably however demonstrates a position of strength in comparison to western economies, who having invested trillions into a stimulus to bounce back from covid no longer have the tools available to offset new economic challenges and are being forced to consider interest rate hikes in the view to curbing rapid inflation. This combined with the knock-on impact of the war may spell trouble for these economies

The strengthening of the RMB against the USD will also help China achieve its goals. Since the conflict commenced the RMB hit a 14 year high against the dollar standing at a peak of 6.31, a response to investors fleeing western markets and seeing China as a “safe haven”. Although the Chinese government has been traditionally wary of the RMB becoming too expensive and hitting export-related work, it seems by 2022 this is deemed a necessary outcome to combat global inflation and rising commodity prices, which will help keep supply chains more stable. This will also allow China to sustain itself as a hub of global growth for the year through increasing imports and helping boost consumerism.

Given this, China’s GDP target should not be framed as “the lowest in decades” as some vindication of the slowdown the western media have long fawned over, but a deliberative and carefully planned calculation to keep economic growth ticking over during a time of prolonged global uncertainty, which of course was taken into context when such a goal was set. It is quite evident that growth rates for the US, UK, and the European Union will be much lower than expected in 2022, yet China is otherwise attempting to reach a growth rate that was anticipated otherwise, demonstrating the inherent competitiveness of the Chinese economy.

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Keywords:   GDP,China