As China's growth headwinds gather speed, Beijing must consider cash handouts to sustain 'common prosperity' drive
China may have reported stronger-than-expected economic expansion in the first quarter of 2022, but pessimism about the outlook for the coming quarters, and even the whole year, is worsening - for good reason.
In the first three months, the world's second-largest economy grew by 4.8 per cent compared to the same period last year.
That growth rate may be slower than the government's set target, but it is higher than the 4 per cent rate it grew in the last quarter of 2021 as well as the estimates of economists.
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But much of that expansion was in January and February, before the onset of the latest Omicron-fuelled Covid-19 outbreak. The surge in infections prompted many of China's manufacturing and trading hubs, including Shanghai and Jilin, to shut down in March and much of April.
Consequently, tens of millions of residents were quarantined at home, factories and businesses closed and supply chains severely disrupted.
Beijing has thus far put on a brave face. Since Monday, authorities have directed state media to publish a barrage of commentaries and analysis pieces that argue that China's economic fundamentals remain strong, with its resilience and vitality intact.
The Chinese leadership have been singing this tune since late last year, even as they warned that the economy would soon face more headwinds because of three major risks - contracting demand, supply chain disruptions and weakening expectations.
Since then, leaders including Premier Li Keqiang have further cautioned that downward economic pressures would worsen as rising complexities and uncertainties at home and abroad take their toll.
Thus far, the government's response has been cautious, to say the least.
The People's Bank of China (PBOC), China's central bank, announced it would cut commercial lenders' reserve requirement ratio from April 25, releasing about 530 billion yuan (US$82 billion) to support industries and businesses affected by tight Covid-19 restrictions.
The 25 basis-point move was smaller than expected and has failed to impress the markets. The International Monetary Fund, meanwhile, cut its growth forecast for China this year to 4.4 per cent - the second such reduction in three months.
The world financial body's forecast is now much lower than Beijing's own target of 5.5 per cent and major international banks have also mostly downgraded their estimates for China to below 5 per cent.
Over the past two years, China has been reluctant to turn on the money tap, unlike the United States and Europe.
That is because its leaders are always mindful of the painful lessons learned from the great easing following the 2008 global financial crisis, and they also expect the economy to bounce back in the latter half of the year once the latest Covid-19 outbreak is tamed - repeating the feat achieved in 2020 and 2021.
But this may be too optimistic, some insiders believe. Wang Yongli, former deputy governor of Bank of China, recently wrote that the Chinese government must prepare for bigger shocks, perhaps even greater than the impact felt from 2008's economic pain.
Wang listed three main worries: the Covid restrictions and lockdowns, ramifications from Russia's invasion of Ukraine and the West's tough sanctions on Moscow, and the divergence of US and China's monetary policies, which could trigger a devaluation of the yuan and accelerate capital outflow.
He urged Beijing to prepare a massive economic stimulus package that includes a plan to prop up capital markets and ramp up social assistance programmes.
Wang's warning is worth heeding. China should overcome its reservations and be ready to undertake comprehensive monetary, fiscal, property, and regulatory easing.
To be sure, over the past few months various central government departments, including the National Development and Reform Commission and the PBOC have made a raft of policy pledges to help businesses battered by Covid-19 outbreaks and lockdowns.
But those steps are limited as they mainly focus on boosting production instead of lifting consumer spending.
In March, retail sales fell 3.5 per cent, the first such contraction in nearly two years, compared to growth of 6.7 per cent in the first two months.
Household disposable income, meanwhile, only saw growth of 6.3 per cent in the first quarter. That figure was lower than the pre-pandemic level of 8.7 per cent for the first quarter of 2019. The latest quarterly survey on consumer spending by the PBOC reflected this weakening trend.
These numbers are among the more compelling reasons for Beijing to focus on boosting consumer spending. China should also learn from the US and Europe and offer bigger direct cash payments or cash vouchers.
In 2020, a number of mostly wealthy cities handed out cash vouchers but the impact was limited because the people in the less prosperous urban and rural areas failed to benefit.
This year's outbreak has again hit low-income families the hardest, with prolonged lockdowns in many cities causing them to be quarantined at home and makeshift hospitals without pay or social assistance.
But the government has long been averse to placing money in the hands of the people and instead prefers to focus state-led investment on infrastructure projects.
It is time to change this mindset. If the current situation continues, it could risk widening the country's income gap - going against the economic-equality drive China's leaders have been so keen to promote under the high-sounding slogan of "common prosperity".
Wang Xiangwei is a former editor-in-chief of the South China Morning Post. He is now based in Beijing as editorial adviser to the paper
This article originally appeared on the South China Morning Post (SCMP).
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