Abstract: In this paper, the author offered an elaborate analysis on China's economic situation in 2021, with a focus on insufficient demand and supply shocks in various sectors. He then pointed out the large scissors gap between PPI and CPI and researched into the factors leading to the gap. In the final part, he shared his views on the economic outlook for 2022, believing the annual GDP growth is estimated to be 5-5.5 percent.
I will briefly discuss my views on the economic situation in 2021 and my preliminary judgment on the economic outlook for 2022 from three aspects, i.e., insufficient demand, supply shocks, and the PPI-CPI scissors gap.
I. INSUFFICIENT DEMAND IN 2021
First, in terms of consumption demand, it made a huge contribution to economic growth in 2021, but this is mainly due to the sharply shrinking of investment demand and cannot prove there was robust consumption demand. From the perspective of per capita consumption expenditure, the indicator in 2021 increased by an average of 5.7 percent in nominal terms and 4 percent in real terms in two years, a fall of 2.9 and 1.5 percentage points respectively compared with 2019. This shows that consumption demand had not recovered to the pre-pandemic level. The main reasons are that the growth of household income did not bounce back to the pre-pandemic level and the income gap was widening. The median disposable income of Chinese residents was significantly lower than the average, indicating lower income growth of the low-income group. However, the low-income group has a higher propensity for consumption. As a result, the widening income gap had a negative impact on consumption demand.
Second, in terms of investment demand, in Q3 and Q4 2021, the contribution of investment demand to economic growth was negative; particularly in the fourth quarter, the figure was -11.6 percent, having a large negative impact on economic growth. In fixed asset investment, two areas showed weak demand: (1) Investment in real estate development. Due to the impact of "three red lines" and "two caps" policies that restrict borrowings of developers, the growth rate of real estate investment had dropped for ten consecutive months from March and turned negative from the third quarter. The annual growth in 2021 was only 4.4 percent. (2) Investment in infrastructure. As local governments imposed tighter regulation and special bonds were issued at a slower pace, the growth rate of infrastructure investment turned negative since the second quarter of 2021 and stood at only 0.4 percent for the whole year.
At the end of 2021, the growth rate of investment started to pick up, a consequence of some policy shifts. In 2022, investment is expected to focus on two areas, i.e., manufacturing and infrastructure. The potential for infrastructure investment is considerable, but the scope for certain areas is shrinking, such as investment in highways. There is still great space for investment in rural development, pension, health care, and education. But overall, there is not as much room as in the past.
II. SUPPLY SHOCKS
China also saw severe supply shocks mainly in three sectors, namely, manufacturing, construction, and the real estate sector. In 2021, GDP growth dropped significantly from 18.3 percent to 4 percent from Q1 to Q4. The growth rate of value added in the above-mentioned three sectors fell by around 24 percentage points, far greater than the fall in GDP growth.
(1) The manufacturing sector: In 2021, the value added of the manufacturing sector grew at a fast rate of 9.8 percent year-on-year. But the quarterly growth rate declined dramatically from 26.8 percent in the first quarter to 3.1 percent in the fourth quarter, down by 23.7 percentage points, which can be attributed to the shortage of chips and coal-fired power as well as policy tightening in some areas.
(2) The construction sector: In 2021, the value added of the construction sector rose at a low rate of 2.1 percent year-on-year. The quarterly growth rate of value added in this sector also dropped sharply from 22.8 percent in the first quarter year-on-year to negative 2.1 percent in the fourth quarter, down by 24.9 percentage points, and turned negative in both the third and fourth quarters. The sector's poor performance in terms of value added was mainly affected by shrinking investment demand.
(3) The real estate sector: In 2021, the value added of this sector grew by 5.2 percent from a year earlier. Yet the quarterly growth rate fell significantly from 21.4 percent in the first quarter to negative 2.9 percent in the fourth quarter year-on-year, down by 24.3 percentage points. The weak performance of the sector was largely due to the impact of regulatory policies.
III. LARGE PPI-CPI SCISSORS GAP
The scissors gap between PPI and CPI was large. In 2021, PPI increased by 8.1 percent while CPI by 0.9 percent, a difference of 7.2 percentage points. In October, the rise of PPI was the highest, hitting 13.5 percent, whereas CPI grew by only 1.5 percent, a gap of 12 percentage points.
The factors that widened the PPI-CPI scissors gap are worth attention:
(1) Among the producer price indexes, prices of production materials increased substantially by 10.7 percent for the year, whereas prices of living materials rose at a lower rate of 0.4 percent annually, which is an important reason why rising PPI did not feed into CPI. Before October, CPI increase had remained at a low rate. After October, PPI started to translate into CPI that rose by 1.5, 2.3, and 1.5 percent year-on-year in October, November, and December respectively. After November, PPI increased at a lower rate but remained at a high level. Therefore, in 2022, we need to pay attention to the transmission of PPI to CPI.
(2) There is a structural divide in PPI. Prices of upstream raw materials rose sharply, while those of downstream sectors increased only slightly due to inadequate demand for investment and consumption. The increase of PPI due to the structural divide led to a divergence in the production and operation of businesses. The upstream businesses generated high profits, while the price hikes were absorbed by the downstream businesses, resulting in difficulties in production and operation, especially for micro and small businesses in the downstream sectors. With policy adjustment, such a divide might be alleviated, yet it is expected to remain a prominent issue in the first half of 2022.
IV. ECONOMIC OUTLOOK FOR 2022
Lastly, a preliminary judgment on economic growth in 2022. The annual GDP growth is estimated to be 5-5.5 percent, featuring a rising trend where the quarterly GDP growth rate is expected to hit 4.5, 5, 5.5, and 6.5 percent respectively. Currently, the industrial sector has begun to pick up. The year-on-year growth of industrial value added reached the lowest level of 3.1 percent in September 2021, followed by 3.5, 3.8, and 4.3 percent in the following three months respectively. The Central Economic Work Conference put forward that under the triple pressures on the economy, local authorities should shoulder the responsibility of stabilizing the economy; and economic growth in 2022 is expected to gradually improve.
This is the comments the author made on Q4 2021 Macroeconomic Policy Report at CF40 Seminar. It is translated by CF40 and has not been reviewed by the author. The views expressed herein are the author’s own and do not represent those of CF40 or other organizations.
