The lowest level in 40 years! Where are the difficulties in economic growth?

The Two Sessions set the GDP growth target for 2022 at 5.5%, which, excluding 2020, is the lowest level in nearly 40 years in China.After the target was announced, there was intense online debate over whether the gradual decline in GDP growth targets is normal.

In 2021, China’s GDP growth rate was 8.1%. On a quarterly basis, the first two quarters of 2021 saw growth as high as 18.3% and 7.9%, respectively, but then sharply declined to 4.9% and 4.0% in the last two quarters.

This 'rise first, then fall' trend in the annual GDP of 2021 indicates that the pressure on China's economic growth remains this year.As for why economic growth in 2022 is so difficult, the author will gradually analyze the three main drivers of the economy—investment, consumption, and exports—to explain the current bottlenecks in China's economic growth.

1. The 'Magic Needle' that Lost its Power

In the past, developing real estate and infrastructure were seen as the magic needles stabilizing China’s economic growth, but now this policy seems to have reached the end of the road.

Let’s start with real estate. In 2021, the financial troubles of many real estate companies became a landmark event, leading to a rapid winter for China’s real estate industry. Although the total sales area and sales volume of commercial housing in China still hit new highs in 2021, their growth rates significantly narrowed, with the sales revenue growth rate reaching a seven-year low.

When the nest is overturned, how can the eggs remain intact? In the harsh winter of the real estate industry in 2021, the sales area and volume of the top 100 real estate companies experienced a rare negative growth. The change in the land acquisition to sales ratio also reveals broader trends, showing early signs of autumn through a single leaf. In 2021, the land acquisition to sales ratio for China’s top 100 real estate firms was 0.29, hitting a five-year low, highlighting developers' cautious investment stance.

From the perspective of official policy, the long-term trend will be to adhere to the principle that 'housing is for living in, not for speculation.'More specifically, the level of 1.79 billion square meters in China's commercial housing sales in 2021 may represent the peak figure for commercial housing sales in the coming years.Recently, there has been some easing of local real estate policies, which merely offers some breathing room for certain companies; however, the likelihood of a sharp rebound in housing prices remains low.

Having discussed real estate, let us now turn to infrastructure. Infrastructure is an important tool for counter-cyclical adjustment in China. Since the global financial crisis, it is evident that infrastructure investment has played a significant role in offsetting the impact of declining exports on China’s economy. This is also why most people are pinning their hopes for this year's 'stable growth' on infrastructure investment.

Times have changed, and excessive infrastructure investment has pre-empted future demand, making it difficult to find a sufficient number of projects that meet return requirements today.As the government increasingly emphasizes controlling macro leverage and preventing and resolving risks, there is little room left for traditional stimulus demand policies.

The experience of the 'four trillion yuan' stimulus package in 2009 demonstrated that blindly launching large-scale projects is inefficient and leaves lasting aftereffects for future economic development. There is merit in 'moderately advancing infrastructure,' but finding the right balance is tricky, and infrastructure investment in 2022 should proceed with caution.

2. Peaking Export Trade

In 2021, China's import and export scale exceeded $6 trillion for the first time, growing by 30% year-over-year. While this is an impressive achievement, it also creates a high base effect for 2022, making it inevitable that export momentum will weaken.

Before the pandemic, China's exports accounted for about 14% of global exports. During the outbreak, China’s rapid resumption of work led the world, and its export share surged to the current 17.6%. There is very little room for further increase in this figure. The reason is simple: the impact of the pandemic on the production side of the global economy is diminishing.

First, after entering 2022, the pandemic remains unpredictable, and some countries may choose to close their borders. However, the trend shows that more economies will opt for a strategy of coexistence with the virus. On February 24 this year, the UK announced that even confirmed cases would not be isolated. Meanwhile, production and exports in some emerging market countries, which were severely affected by the pandemic, are gradually recovering.

As more countries choose a strategy of coexistence with the virus, the cost of China's dynamic zero-COVID policy will inevitably rise, leading to weakened export competitiveness.

Second, developed economies, represented by the United States, have already passed the peak of economic recovery since the pandemic. We all know that many major countries around the world experienced two consecutive years of significant fiscal stimulus during the pandemic. Now, having crossed the peak of economic recovery, it means that the monetary policy tone of various countries is preparing to tighten.Slower demand expansion will also affect China's external demand.

In addition, the high raw material costs and the appreciation of the renminbi that Chinese export companies face are also highly unfavorable for exports. Currently,there is a widespread phenomenon among domestic small and medium-sized enterprises engaged in exports where they either 'dare not accept orders' or experience 'increased revenue without increased profits.'

In summary, against the backdrop of improvements in global supply chain issues, the latter stages of economic recovery, and greater operational pressures on domestic foreign trade enterprises, it is expected that China's high export growth momentum may have already ended.

3. Sluggish Consumption

By the end of December 2021, China's retail sales growth had fallen to 1.7%. To stabilize the economic growth target, boosting consumption as soon as possible has become an urgent necessity.

Although we cannot implement consumer subsidies as directly as Western countries through 'helicopter money,' during the pandemic, China introduced stimulus policies like issuing consumption vouchers to encourage spending. However, these measures had limited impact on overall retail sales growth and were difficult to sustain.

To truly boost consumption, two key factors are indispensable: stable employment and increased household income levels.

The urban surveyed unemployment rate of 5.1% does not fully reflect China's real employment situation. With 200 million people in flexible employment and a 14.3% unemployment rate for the 16-24 age group, alongside unemployment insurance funds running deficits for three consecutive years, these figures highlight the severity of the employment challenges.

In 2021, China’s GDP reached 110 trillion yuan, ranking second globally, but per capita GDP further lagged behind the United States, with the gap reaching its highest level in the past 61 years.

A society with significant income inequality inevitably becomes one of excess because the wealthy possess far more income than they can consume, while the poor lack proportional income relative to their output, leaving them unable to absorb all the surplus supply.If we cannot provide a better employment environment that increases household incomes and changes residents' growth expectations, achieving consumption growth will remain challenging.

4. Conclusion

According to estimates, for China to achieve the long-term goal of reaching the per capita GDP level of moderately developed countries by 2035, it needs to maintain an average annual growth rate of approximately 4.7% over the next 15 years. Based on this, the 5.5% growth target remains within expected levels.

The issue lies in the fact that GDP itself is not the purpose of economic development but rather a means to improve the happiness of the entire population.We need this tool to function more effectively as China pursues higher-quality development.

In the past, much of our money flowed into fixed asset investments such as real estate, and household wealth primarily grew through property value appreciation. However, with the exhaustion of the demographic dividend and urbanization entering its later stages, this historical process is nearing its end. New infrastructure initiatives, common prosperity, and other directions signal that we are building a new economic system and a revised income distribution structure.I believe that China has the strength and potential to face the pressure of growth, but as the saying goes, 'Heaven will give it a mission only after giving it hardships,' and the pains of economic transformation are inevitable.

Gelonghui Statement: All opinions expressed in this article belong to the original author and do not represent the views or positions of Gelonghui. A special reminder: Investment decisions should be based on independent thinking. The content of this article is for reference only and does not constitute actual operational advice. Trading risks are borne by the reader.

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