Genuine recovery in China depends on stronger demand

By Zhang Jun Source:Global Times Published: 2017/10/9 21:03:39

Illustration: Luo Xuan/GT

According to statistics, our real GDP growth rate posted a significant decline in 2012, which actually seems to have been a turning point.

Interestingly, despite the continued slowdown in GDP growth, China's employment remains strong and the unemployment rate has remained stable. Since 2013, about 13 million new urban jobs were created annually, which I think is a miracle.

Had there not been a strong employment promotion policy introduced by the government in 2013, there would be no way to explain how this miracle happened.

How did the government manage to do this in the face of a sharp decline in economic growth? Data on trends in the manufacturing and services sectors from the National Bureau of Statistics may offer some insight.

Over the past few years, employment growth in the services industry has been far ahead of the manufacturing sector. Six years ago, this situation was just the reverse. Especially after 2012, owing to the government's employment promotion policy, the employment growth of the services industry began to accelerate.

How can this be done by policy? With economic growth continuing to decline, the manufacturing sector keeps shedding staff. To solve such a large employment problem within several years, the only choices are for the laid-off workers to stay home or enter the low-end services industry. Considering that most modern services are derived from manufacturing, consumer services are more likely to be the focus of employment promotion policies.

We do not have microeconomic data, but if we put the financial, banking, insurance, education, communications and other modern services industries aside, the other industries can be regarded as low-end services. Viewed in this way, we see that after 2012, the ability of the low-end services industry to create new jobs has expanded at incredible speed.

Unemployment hasn't caused big problems despite a continued downward spiral in the economy, largely thanks to the employment promotion policies. However, it's not the case that a demand for large scale employment has been created as the services sector needs to achieve an improvement in productivity. Growth in the services sector's productivity at large barely rose. 

Over the years, due to economic and investment downturns, China's manufacturing industry has released more labor. But with employment in the services sector continuing to expand, why did labor productivity growth also experience a significant decline?

If the government did not adopt a strong employment promotion policy since 2013, I doubt this would have taken place, or at least not to the same degree. A strong employment promotion policy apparently eased employment pressure in the short term, but as to the medium and long term, a strong employment promotion policy will not relieve downward economic pressure.

In any economy, a recovery in the short term mainly depends on demand improvement. If demand improves and the economy recovers, this will create the conditions for structural reform. We should realize that demand hasn't improved greatly for the past few years. At the same time, we are promoting supply-side structural adjustment.

This approach might not improve the macroeconomic situation very much, because the debt rate and leverage ratio cannot be significantly reduced, and nominal GDP growth will also be reduced.

The easing of downward pressure on the economy is shown in the improvement of demand and the rise of overall price levels. But we have seen that the producer price index (PPI) declined for four and one half years, and it wasn't until one year ago that it started to rise slowly. However, a rebound in the reading doesn't indicate a substantial improvement in domestic demand, but it may signify improved demand for exports. When this signal was amplified, enterprises began to increase inventory.

But, why didn't the consumer price index change over the past year, while the PPI rose so fast? The reason is that only prices of upstream industries rose very fast, reflecting capacity reduction in the upstream industries caused by supply-side structural reform. Because final demand didn't significantly improve, cutting excess capacity gave the illusion of an economic recovery and re-inflation on the market.

This illusion has also sparked recent heated discussion. Now it seems that 7 percent GDP growth is possible, and will not quickly lead to inflation. In recent years, our consumer-price inflation target has been 3 percent, which we did not reach, indicating that demand has not substantially improved. The nominal GDP growth rate in these past few years has been lower than the real GDP growth rate, and weak demand has caused problems for enterprises. That situation doesn't help us to deal with our debt, reduce leverage and promote structural reform.

The author is the dean of the School of Economics at Fudan University. bizopinion@globaltimes.com.cn



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