Following the country’s shift away from some of the most stringent Covid-19 restrictions in late 2022, the economic recovery of China is right on track. As per Kavan Choksi the country’s first-quarter gross domestic product (GDP) in 2023 grew 4.5 % and marked the highest growth of China’s economy since the first quarter of last year. China’s GDP expanded by just 3 % in 2022 and missed its official growth target of about 5.5%. However, the economy of the country is expected to rebound in 2023.
Kavan Choksi points out that China’s economy is rebounding, but reforms are still needed
The economy of China is geared up to rebound in 2023, with activity and mobility picking up in the country subsequent to the restrictions, thereby providing a boost to the global economy. China’s economy is expected to expand about 5.2 % this year, as opposed to just 3% last year. This is good news not just for China but also for the world at large. After all, the Chinese economy is expected to contribute a third of global growth this year.
However, even though China’s economy is rebounding, it does still face a number of economic challenges. The contraction in the real estate sector remains a major headwind in the nation. Moreover, there are still certain uncertainties associated with the evolution of the virus. For the longer-term, headwinds to growth include a shrinking population, as well as slowing productivity growth. China’s economy requires more comprehensive macroeconomic policies and structural reforms for the purpose of securing its path to recovery. Strategies are also needed to promote balanced, green, and inclusive growth in the country.
As per Kavan Choksi, it would be a prudent choice to keep the fiscal policy neutral this year, along with additional monetary policy accommodation focused on helping secure the recovery amid muted inflation pressures and growth below its potential. Systematic restructuring of certain troubled real estate developers can also be useful in cutting down risks.
Owing to the diminishing returns to capital investment and shrinking labor force in China, growth in the near future shall majorly rely on improving declining productivity growth. In the absence of proper reforms, its growth can fall below 4 % over the next five years. However, it is vital to understand that a feasible yet ambitious set of reforms can improve these prospects to a good extent. It can contribute to a more inclusive growth raising the role of household consumption in demand. There are many types of reforms that can help boost growth in coming years, like strengthening unemployment and health insurance benefits, as well as gradually lifting the retirement age to increase labor supply.
Trying to reform state-owned enterprises to close their productivity gap with private firms can also deliver advantageous results. In fact, such reforms have the capacity to increase the income level in China by around 2.5 % in five years.
The stronger-than-expected GDP growth in Q1 of 2023, along with surprise double-digit export and retail growth in March, have spurred a good degree of optimism in markets regarding China’s economic rebound. However, the recovery of China might not be even across all sectors. In order to maintain the growth momentum, the government of the nation must work harder and strive to effectively address lingering domestic risks and external conditions.