Abstract:

Covid resurgence in the second quarter of 2022 has dealt severe blow to both supply and demand in China. While supply saw rapid rebound as the outbreak came under control with production and logistics fast restored, demand recovery has been sluggish. Increasing divergence has also been observed between the private sector and the government: while private sector demand remained weak, the government took strong measures that have helped counter the downward pressure on the economy and played an important role in stabilizing growth and credit.

In the second half of the year, the Chinese economy will continue to face multiple challenges, including pandemic-induced uncertainties, weakening of consumption, enlarging revenue-expenditure gap of local governments, possibilities of new risk events, and geopolitical conflicts. Against this backdrop, while it remains a priority to implement targets and tools that could boost demand to achieve a decent annual growth, policies addressing structural problems would also be essential.

Policy recommendations to this end include: 1) increase government debt financing to close the revenue-expenditure gap; 2) reduce the interest rate, and clearly signal to the market that policymakers are planning rate cuts by 25 basis points a time until the economy stays vibrant for two or more consecutive quarters; 3) stabilize expectations for regulatory policies and provide market players with adequate space for trial-and-error in order to resolve problems while achieving growth; and 4) step up government endeavors to pull the real estate market out of the current quagmire.

Key words: Macroeconomy, fiscal policy, monetary policy