Abstract: Income confidence and employment are the determinants of consumption. We should thus focus on the employment and income confidence of employers both in the public and private sectors. As for whether domestic demand in 2023 should be stimulated by investment or consumption, it is less than an either-or question because the two can actually reinforce each other. Currently, the main bottleneck against the free flow of China’s economic circulation is consumption which deserves more attention. Additionally, in 2023, the growth of infrastructure investment might slow down compared with 2022.
Recently, positive signs have been seen in the financial market, suggesting significant improvement in the market’s expectation for economic recovery in 2023. Foreign investors are also upbeat about China’s economic rebound, with foreign “smart money” continuing to flow into China.
I’m bullish about the forecast of China’s GDP growth. 5% is definitely within reach, and with efforts, we can even strive for a higher growth rate. Structurally speaking, domestic demand would be strong in 2023 while external demand would be relatively weaker, and thus export might decline.
Here, I want to focus on a key question: should domestic demand in 2023 mainly be driven by investment or consumption? Debate on this issue has heated up. Although it is sometimes an either-or question between consumption and investment, the two are actually in unity and can reinforce each other.
In the special environment of 2023, consumption is the main bottleneck against the flow of China’s economic circulation. Currently, the main challenge facing China’s economy is how to stimulate consumer demand. Therefore, I tend to favor the approach of boosting consumer confidence to expand domestic demand, especially during early 2023 when the economy has just restarted. We need to seize the time window to fire up market confidence as soon as possible. In 2023, domestic demand is worth looking forward to.
I. FIXED-ASSET INVESTMENT FROM THE PERSPECTIVE OF THREE PILLARS
Among the three pillars of fixed-asset investment, the first one is infrastructure investment. In 2022, infrastructure investment grew at a fast rate. With the policy support, the growth rate of nominal infrastructure investment reached around 10%. Built on that, stronger support is needed in 2023 to maintain or enhance the growth rate of infrastructure investment, which is quite difficult to achieve. It is more likely that the growth of infrastructure investment might slow down in 2023 compared with 2022.
The second pillar is real estate investment. In 2023, the real estate sector might witness “strong policy support and weak performance”. The growth rate of real estate investment might rise slightly from its rock-bottom level, thereby dampening its negative impacts on the economy. But real estate investment would no longer be the engine of economic growth.
The third pillar is manufacturing investment. In 2022, the overall manufacturing capacity utilization rate is 1.9 percentage points lower than in 2021, indicating idle capacity in the industrial manufacturing sector. All of the sectors with rising or relatively stable capacity utilization rates are from upstream energy bulk commodities such as mining selection, and oil and gas, which geographically explains why provinces such as Shanxi, Shaanxi, and Inner Mongolia have better financial situations. We believe that excluding upstream mining and oil and gas, the remaining manufacturing capacity utilization rate would fall by more than 2 percentage points. These industries have been hit the hardest.
Two major negative factors will prevent manufacturing investment from being strong in 2023. For one, the manufacturing sector's current capacity utilization rate is significantly low. The other is that external market demand is less optimistic in terms of exports. Manufacturing investment will be bolstered by a rebound in domestic demand, which panned out well and set a high base in 2022, but it will also be hampered by weakening external demand and the current decline in capacity utilization. Following that, the performance of manufacturing investment will be determined by the recovery in consumer demand as well as the performance of infrastructure and real estate. However, as previously stated, infrastructure and real estate investment are less of a task-taker, whereas consumer demand recovery has more potential to be tapped.
Ⅱ. CONSUMER SIDE: EMPLOYMENT AND INCOME CONFIDENCE OF TWO GROUPS
Consumer demand was so dampened in 2022 that caused negative growth in retail sales of consumer goods. With such a low starting point, a rebound in consumption in 2023 is worth anticipating, and consumption is likely to be the primary driving force behind the economic recovery. However, there are external pressures on consumption that cannot be ignored. The most direct determinants of consumption are income confidence and employment, and we can examine employment and income confidence in government-related and market-related groups.
1. Government-related employment and income confidence: civil servants and employees of public institutions
Civil servants make up a large portion of government-related employment. Furthermore, the income of civil servants in each locality serves as a baseline for the income of other social classes. Local governments have experienced a sharp decline in fiscal balance over the last three years as a result of the COVID-19 pandemic's impact on both income and expenditure. If this has an impact on the income expectations of civil servants and those employed in public service institutions, and if they make up a sizable proportion of the population in a given area, it may shake the income confidence of other groups.
China must recognize these difficulties for what they are to prevent short-term difficulties from becoming long-term difficulties.
To reverse this trend, we must, on the one hand, reopen the consumption and economic cycles and improve market dynamics in order to increase local government's tax revenues. However, because it is difficult to significantly increase real estate tax revenues and land concessions in a short period, stronger policies are required to activate local economic dynamics.
On the other hand, in order to improve the local financial situation, it is necessary to accelerate the repayment of local government debt, including rationalizing the fiscal relationship between the central and local levels. In addition to the financial risks posed by local government debt problems, it is critical to recognize that local government financial difficulties may have an impact on consumer demand repair and economic recovery.
2. Employment and income confidence of market entities: private enterprises and individually-owned businesses
The facts below should be noted when studying market confidence in employment.
The first is the slump in external demand. The year 2023 still faces a great risk of a global recession. The growth rate of China's exports is likely to see a fall, with a possibility of negative growth. Foreign trade, especially the exports of the eastern coastal regions will be negatively affected, which in turn will weaken the employment and income confidence of related groups.
Second, the pandemic shock had cleared out market players, which did not lead to optimized resource allocation, but might even have the opposite effect.
Survival of the fittest under market competition usually brings about optimal allocation of resources and improved efficiency, which is conducive to economic growth. But business failures caused by the pandemic shock in the past three years are very different from that under the market competition. In the last three years, many market players encountered operating difficulties or even business failures. However, many failures were not caused by the wrong business decisions of the enterprises themselves, but by unpredictable factors, or force majeure.
Moreover, during the years of economic reform, development, and transformation, state-owned enterprises and private ones have faced different competitive environments in some aspects. The Central Economic Work Conference in December 2022 brought confidence to the market with its emphasis on “equal treatment for state-owned and private enterprises should be realized from institutional and legal aspects.” Ensuring that private enterprises enjoy equal treatment as state-owned enterprises is a very positive signal.
In the last three years, it was the private enterprises and individual entrepreneurs that remained most vulnerable to the pandemic shock. This group of market players is dynamic itself, and can largely affect customers’ confidence in employment and income.
In a word, the pandemic shock is not the same as market competition featuring the survival of the fittest. It may even be the opposite as it first brought down private enterprises and individual entrepreneurs.
In the face of the pandemic shock, extra assistance was especially needed for private enterprises and individual entrepreneurs. As of the end of August 2022, there were 163 million market entities registered nationwide, among which 109 million were individual entrepreneurs, accounting for about 2/3 of the total number of market entities. 90% of the country’s market players are in the private sector, affected by the pandemic shock most heavily. The scarring effect caused by the pandemic will require some time to repair. If the scar can be quickly healed, the impact on future consumption and investment will be relatively limited. But if the repair time takes too long, the pandemic shock will leave a longer impact on the confidence of market players and future consumption and investment behavior.
Therefore, we should seize the opportunity as the Chinese economy reboots to shore up the confidence of the self-employed, small businesses, and private companies. They are both producers and consumers, and stimulus to consumption could help repair their mental traumas.
Confidence itself is a public good with externalities, which are an important cause of market failures, and so policy supports are needed to boost confidence. Pessimism and optimism are both infectious, with the power to affect the interplay among investment companies and between consumers and businesses.
It’s difficult for any individual consumer or business to affect the general level of confidence in the macroeconomy; policy efforts, however, have the power. Compared with other major economies like the United States, the Eurozone, and Japan, China still has adequate fiscal and monetary policy space to be deployed in order to bolster demand and growth in 2023.
3. Consumption and investment are mutually-reinforcing
Views diverge as to whether China should rely on investment or consumption to promote growth in 2023. While some call for stimulating consumption, others don’t count on spending to boost underlying economic growth, which should be pursued by investment in production factors or technological advances instead. But consumption and investment actually go hand in hand, and we should not view the pair of mutually-reinforcing drivers for growth separately.
The ultimate goal of economic development is to improve people’s lives. The fundamental challenge underlying China is its unbalanced, insufficient development failing to meet the increasing demand of the Chinese people for a better life. And the pursuit of a better life is essentially the process of expanding consumption and demand. Investment is, therefore, a means to the end of consumption. Of course, demand increase will not sustain without supply improvement.
Production, exchange, distribution, and consumption are all indispensable to unimpeded economic circulation. Without demand, manufactured goods would only end up in warehouses, wasting production capacity. Capacity utilization in China has already lowered over the past year. With consumption dragging the national economy, boosting demand has emerged as a major challenge facing China.
Consumption and investment could be mutually-reinforcing. For example, increased demand for new-energy cars could shore up the expectations of producers and stimulate their investment. Policies must be front-loaded and strong enough to light up market confidence as soon as the economy gets back on its feet to drive sound economic circulations.
This is the comment made by the author at the monthly data analysis conference of the China Macroeconomy forum on January, 2023. It is translated by CF40 and has not been reviewed by the author. The views expressed herewith are the author’s own and do not represent those of CF40 or other organizations.
