Stabilization policy is recipe to address China’s economic challenges

Beijing, the capital of China. / CFP

Beijing, the capital of China. / CFP

Editor’s note: Matteo Giovannini is a finance professional at the Industrial and Commercial Bank of China in Beijing and a member of the China Task Force at the Italian Ministry of Economic Development. The article reflects the author’s views, and not necessarily those of CGTN.

The economic growth trajectory of China is arguably one of the most important indicators that foreign analysts and commentators constantly monitor due to the high level of integration between the world’s second largest economy and the rest of the world.

On April 18, Fu Linghui, spokesperson of the National Bureau of Statistics (NBS) and director-general of the Department of Comprehensive Statistics of the NBS, delivered a speech at a press conference organized by the State Council Information Office (SCIO) to unveil China’s performance in the first quarter of 2022.

China’s economy beat expectations and grew by 4.8 percent in the first quarter period of 2022 compared with a year earlier, overcoming the median survey of Bloomberg analysts that had predicted 4.3 percent growth in the first quarter and up from 4 percent growth in the last quarter of 2021

After a detailed presentation of statistical data, a Q&A session brought to light a series of stimulus measures that the Chinese government is currently putting in place in order to better facilitate the domestic growth in a challenging year.

A recurring word that the speaker used while answering the questions of the press was stabilization. The COVID-19 surge in Shanghai has had a severe impact, erasing around a 0.5 percentage point gain in China’s first-quarter GDP, and it is likely that it will affect even the remaining part of the year. Stability has therefore become a necessity if the country wants to mitigate the economic repercussions created by the latest wave of the COVID-19 pandemic.

Last month, Chinese Premier Li Keqiang announced a GDP growth target for 2022 at around 5.5 percent during China’s Two Sessions. Although the target seems ambitious, it is the task of the Chinese government to make bold decisions using all macroeconomic tools available, such as fiscal, monetary and exchange rate policies, finding the right balance between economic development and pandemic response in order to ensure that people’s needs are fully met.

I believe that one of the most urgent acts of intervention is the stabilization of the job market. This requires firstly the introduction of measures that pay particular attention to rural workers, college graduates and disabled workers, who represent the most vulnerable categories and those who have been the most affected by the pandemic.

Considering the record number of college graduates and the growing economic pressure, China is now taking initiatives to create jobs through government-sponsored internships and to support workers who rely on flexible payrolls. The introduction of incentives in the form of subsidies to companies that create internships and eventually hire the interns represents a well-crafted policy because it guarantees easier access to the job market to skilled young professionals.

In terms of fiscal policy, the introduction this year of 2.5 trillion Chinese yuan in tax incentives, ranging from corporate tax deductions and value-added tax (VAT) exemption for small-scale taxpayers to deferred tax deadlines and period extension for filing tax returns, represent necessary tools to support businesses and alleviate their current pressure.

I personally find extremely targeted the introduction of research and development (R&D) expenses deduction for technology-based small and medium-sized enterprises (TSMEs) that will be raised from 75 percent to 100 percent.

Innovation plays a critical role at a time when China’s economy is rapidly transitioning from high-speed growth to high-quality development and the launch of dedicated policies that incentivize investments in R&D will lead to industrial upgrades and consequent economic growth in what is already a highly tech-intensive market environment.

In terms of monetary policy, the People’s Bank of China (PBOC) has recently taken the initiative to guarantee financial support for businesses by lowering the reserve requirement ratio (RRR) for most banks by 25 basis points, and for smaller banks by 50 basis points . According to the central bank’s calculation this decision translates into a release of about 530 billion yuan in long-term liquidity to mitigate a slowdown in economic growth.

I am convinced that this move, which represents the fifth announcement of an RRR cut by the PBOC since the start of the pandemic, comes at an appropriate time because it allows banks to free a larger amount of funds providing financial support to the real economy.

The People’s Bank of China. / CFP

The People’s Bank of China. / CFP

The possibility for those industries and small and medium-sized enterprises (SMEs) that have suffered the most the consequences of the pandemic to gain access to a higher level of funding at lower financing costs will translate into economic growth and job creation.

The recent release of a guideline to accelerate the creation of a unified domestic market that connects the Chinese mainland with its Hong Kong Special Administrative Region, aimed at creating a high-standard market system and at promoting high-quality development, represents another key policy.

The establishment of a domestic market that relies on unified standards is expected to be efficient, fair and open, removing all impediments such as segmentation and protectionism that prevent economic circulation of products.

In my view, the creation of a unified market is going to lay the foundations of a new development paradigm that focuses on healthy growth, on a transparent market environment for businesses and on an innovation-friendly ecosystem with high-quality jobs.

In addition, the unified market could guarantee a proper allocation of resources and a drastic reduction of transaction costs. This will result in more trade, higher profit margins for companies and an ecosystem that promotes sustainable economic growth.

All in all, the package of measures proposed by the Chinese government is not only a necessary step to ensure smooth sailing through current economic headwinds but also a move that plants the seeds for long-term growth with sustainability, inclusiveness and fairness at its core.

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