Mainland China’s economy has started to recover from the coronavirus shock, but the recovery is uneven, with a V-shaped rebound in infrastructure and property markets while private-sector demand has lagged far behind. Private investment is still below pre-pandemic levels and investment lost today means lost productivity gains for the longer term.
This uneven recovery has implications for the trajectory of China’s potential medium-term growth. Private investment has slowed this year because of lower domestic and global demand, a stock overhang, falling profits, and rising US-China tensions.
Investment makes up about 42 per cent of GDP and is important for long-term growth. Adding plant, equipment, machinery and other physical capital not only increases labour hiring but also lifts capital stock per worker.
One clear impact on human capital is the loss of schooling because of lockdowns, though this has been mitigated by online learning. The more worrying impact on human capital development is due to lost job opportunities, especially for the 8.7m new university graduates. There is potential scarring if they cannot kick-start their careers or they settle for lower-paying and lower-skilled jobs. Displaced workers taking less stable and lower-paid jobs will also delay their career development.
However, the pandemic has re-invigorated investment in healthcare. Investment in medical-related industries has risen 16.4 per cent over the previous year and is likely to spill over into areas beyond COVID-19, including integrating IT into medicine through increased digitisation, cloud computing and big data.
IT-related medical expenditure is set to double by 2024 and a healthier workforce taking fewer sick days can help to increase labour productivity.
Meanwhile the pandemic has strengthened state banks’ preference for lending to large public projects and state-owned enterprises rather than smaller enterprises. As private firms are more efficient, this will have a lasting negative impact on the efficiency of credit allocation and thus on productivity growth.
While digitalisation has driven productivity enhancement worldwide, China is only mid-range globally, its digital economy accounting for around 35 per cent of GDP, and prior to COVID-19, the pace of digitalisation and automation was slowing.
However, the pandemic is giving digitalisation another strong push. Households are shopping online, working-from-home has increased electronics demand, companies are investing in automation, and the government has committed to supporting further digital infrastructure.
The country’s potential growth is expected to fall by roughly 0.6 percentage points on average over the next three years because of slower private investment, lost human capital gains and credit misallocation. However, faster digitalisation should offset part of the negative impact from COVID-19.
Furthermore, Beijing’s targeted fiscal stimulus has resulted in a V-shaped rebound in growth in infrastructure investment. We expect infrastructure investment to accelerate to more than 15 per cent in the coming quarters with an increased focus on 5G development, electrical-vehicle infrastructure, big data, and artificial intelligence.
Moreover, development of new infrastructure will lead to productivity spill-overs as it can help foster innovation and increase technology diffusion.
While the COVID-19 shock is likely to cause a negative shock to potential growth, policymakers are also likely to take a number of reform and opening up measures that can help to further mitigate the medium-term negative shock.
Increase support for digital infrastructure development will accelerate the productivity gains from the digital economy. Reforms to level the playing field between public and private firms can help to improve credit efficiency and reinvigorate more private-sector confidence which can help prop up private investment.
Support for human-capital development through job training programs as well as land reform and household registration reform can increase labour productivity. And further opening up with other countries can increase collaboration which can lift technology growth, further supporting productivity growth.
First published 9 September 2020.
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