Wha, uh, hey. I'm just confirming my priors, give me one minute:
From Asia Times, January 30, 2023:
Government issuing ‘consumption coupons’ to promote purchases but it will take more than mild discounts to restore consumer confidence
Forecasts for China’s economic growth in 2023 diverge widely. While international organizations and China watchers abroad predict growth of 4% as reasonable, most Chinese economists believe that growth of 5-6% is more likely.
The debate has a lot to do with assumptions about China’s potential growth rate. Many models can be used to estimate the potential growth rate, but the simplest and most credible is the Solow model.
Based on this model, a country’s GDP growth rate depends on the growth rates of its stock of net capital, its population size and its total factor productivity.
China’s population has now stalled and its capital growth depends on its national savings. On this count, China has an edge, with national savings accounting for 45% of its GDP. China’s stock of net capital is 3.6 times its GDP and its depreciation rate is 5%. This means that its annual savings translates into 7.5% growth in its net capital stock.
GDP growth brought about by capital accumulation would be half of this, or 3.75%. Previous studies have found that total factor productivity growth contributes 20–40% of GDP growth. Based on this arithmetic, China’s potential growth rate in 2023 is in the range of 4.7–6.3%, justifying Chinese economists’ forecasts.
But China faces several challenges along the way to achieving this potential growth rate in 2023.
The first is how the Covid-19 pandemic will continue to evolve. Chinese authorities lifted the country’s strict zero-Covid policy in early December 2022. Infections quickly peaked in most provinces but the travel and retail sectors bounced back soon after.
The uncertainty is whether a second wave of infections will come in the spring and how severe it will be. Considering this uncertainty, we should not expect high rates of growth in the first two quarters of the year.
The Chinese government should make preparations for a second wave of infections. This includes promoting vaccination, increasing ICU capacity and shoring up medical supplies.
The second challenge is declining external demand. The bottleneck to growth of China’s economy is clearly on the demand side — on average, 20–30% of production capacity is idle.
Over the past three years, the Chinese government has relied heavily on investment to boost demand. But the incremental returns on this investment are diminishing. Capital formation has at best contributed 2 percentage points to China’s growth in recent years.
Exports have made a significant contribution to sustaining China’s growth over the same three years. But as recession fears loom large across the global economy, external demand is likely to falter in 2023. China must shift to domestic consumption to generate enough demand to maintain its growth.
This leads to the third and toughest challenge for China’s growth in 2023. Before Covid-19, domestic consumption grew by a respectable 7% most years. The share of GDP attributable to domestic consumption increased from 48% in 2010 to 55% in 2019. But over the past three years, domestic consumption has slowed.....
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