China's economy showed great resilience and its performance exceeded expectations in the first half of this year. Yet with the rising risk of global stagflation, compounded by mounting external instability, increasing uncertainties, and the triple-pressure of contracting domestic demand, supply shocks and weakened expectations, the Chinese economy faces strong headwinds as it seeks to achieve its annual growth target.
However, thanks to government efforts to balance pandemic prevention and control measures with economic and social development, the policy mix for stabilizing the economy will shore up growth in the second half of the year.
Sporadic outbreaks slow growth in Q2
In the first half of 2022, China's GDP grew 2.5 percent in real terms, with the growth rate in the second quarter of the year being only 0.4 percent due to sporadic COVID-19 outbreaks and multiple external factors. But in May and June, as the effects of various policies began to set in, key economic indicators suggested a rebound.
For example, the added value of large-scale industries and manufacturing purchasing managers' index picked up, and the urban surveyed unemployment rate began declining with investment playing a pivotal role in spurring economic growth in the first six months.
In a nutshell, China's economy has distinct bright spots.
First, inflation is well under control in China. The central government implemented policies to shore up supply and stabilize prices which, to a large extent, helped offset the impact of imported inflation. For instance, the consumer price index rose by 1.7 percent year-on-year in the first half and 2.5 percent year-on-year in June, while the producer price index increased 6.1 percent year-on-year and 7.7 percent year-on-year respectively in the same periods.
Second, foreign trade has seen strong growth. In the first half of the year, China imported and exported goods worth 19.8 trillion yuan ($2.93 trillion), up 9.4 percent year-on-year, with exports accounting for 11.14 trillion yuan, up 13.2 percent, and imports for 8.66 trillion yuan, up 4.8 percent. As a result, the trade surplus topped 2.48 trillion yuan.
Not only has trade grown in volume but also its structure is being optimized. In fact, general trade grew by 13.1 percent, accounting for 64.2 percent of the aggregate trade volume, an increase of 2.1 percentage points compared with the first half of last year.
Impact of Fed rate hike on yuan modest
Third, the US Federal Reserve's rate hikes have had a relatively modest impact on the Chinese currency. While the hike in US interest rates caused a sharp decline in the Japanese yen, British pound and the euro, the yuan remained relatively stable against the US dollar, albeit with a moderate depreciation marked by two-way fluctuations. Which reflects the resilience of China's financial system and its strong economic fundamentals.
And fourth, China's industrial transformation and upgrading have accelerated, as evidenced in the first half growth of value added in the high-tech manufacturing industry, by 9.6 percent year-on-year, 6.2 percentage points higher than all large-scale industries. As for investment in high-tech manufacturing and service industries, it grew by 23.8 percent and 12.6 percent respectively, while favorable policies facilitated the flow of capital and resources, paving the way toward a low-carbon economy.
The good performance of the economy in the first six months of 2022 was primarily due to effective implementation of the policy mix which coordinated pandemic response and economic development. The policy mix has proved effective in ensuring the smooth functioning of logistics and supply chains, especially in shoring up China's nearly 160 million market players, including micro, small and medium-sized enterprises and the self-employed.
Inflation controlled relatively well
The CPI as a whole was relatively low, averaging only 1.7 percent in the first half of the year. But it picked up later, reaching 2.5 percent in June - in line with the policy target of about 3 percent for the whole year.
Meanwhile, the producer price index fell from a peak of 13.5 percent month-on-month in October last year to 6.1 percent in June this year. But the fact that the prices of basic consumer goods remained stable provided robust support to the "vegetable basket project" and "rice bag project". So food prices have remained relatively stable, market supply has grown, and supply of basic essentials is ensured.
But the price hike upstream is bound to be transmitted to consumer goods, and so the recent trend of a moderate increase in the CPI may continue, but within a controllable range. And though the PPI has dropped, it could increase in the second half.
Since China relies, to a large extent, on imports of oil, natural gas, iron ore and coal, its domestic production and supply of these goods can only partly offset imported inflationary pressure, because global inflation has remained high as reflected in the rising prices of food, oil, natural gas, iron ore and coal.
And since rising prices of raw materials lead to higher industrial costs, they will have an impact on China as a large manufacturing country, and micro, small, medium-sized and private enterprises in the middle and lower reaches may bear the brunt of rising raw material prices.
Foreign trade increases against global trend
China's foreign trade grew 9.4 percent in the first half, thanks to an increase in imports from and exports to major trading partners, such as the Association of Southeast Asian Nations, the European Union, the United States, Japan, the Republic of Korea and countries involved in the Belt and Road Initiative.
Moreover, exports of high value-added electromechanical products, trade in services and digital trade are growing at a faster rate. New industries and models are developing at a faster pace, and the proportion of general trade is increasing, with trade with Belt and Road countries growing faster than average. And private enterprises now account for a larger portion of China's exports.
Yet in the second half, China could face headwinds due to shrinking external demand. In addition, the US Fed's rate hikes and the devaluation of the yuan could also work against China's imports, a problem compounded by other uncertainties in trade and the international environment.
That said, China's economy is resilient, because it is supported by a comprehensive industrial chain. As such, the country will continue to promote reform and opening-up, optimize the business environment, and increase inputs in research and development. Despite all that, trade growth could slow down.
Recovery expected in third quarter
Looking ahead, China's economy faces multiple challenges and potential risks. In the short term, several factors will weigh on economic recovery, including imported inflationary pressure, high unemployment among the youth, subdued consumer spending, adjustments in the real estate market, and turbulence in global financial markets. In the long run, an aging population, a shift from the old to new growth drivers and heightened competition between China and the US will also pose challenges to the sustainable development of the Chinese economy.
Yet China's major economic indicators have stabilized; in fact, they are on the rebound. If the trajectory of the past two months is any guide, I expect China's economy to rebound strongly in the third quarter, with GDP growth being more than 5 percent and the momentum continuing into the fourth quarter.
In fact, the Chinese economy can be expected to return to normal next year, with GDP growth reaching 5.2 percent. And over the course of the 14th Five-Year Plan (2021-25) period, the economy is expected to grow at an average rate of about 5 percent.
The author is deputy director of the Economic Policy Commission of the Western Returned Scholars Association (Overseas-educated Scholars Association of China). The views don't necessarily reflect those of China Daily.