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An Assessment of China’s Economic Growth in the First Quarter

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Authors: Chan Kung and He Jun

On April 16, China’s National Bureau of Statistics has released the economic data for the first quarter of 2021. Preliminary estimates show that China’s GDP in the first quarter was RMB 24.931 trillion, an increase of 18.3% year-on-year and 0.6% quarter-on-quarter at comparable prices. The first-quarter GDP was also 10.3% higher than the GDP in the first quarter of 2019, with a two-year average growth rate of 5.0%.

It should be pointed out that the 18.3% year-on-year GDP growth in the first quarter was an unusual growth under the low base effect. While the GDP growth in the first quarter was impressive, it was still slightly below market expectations of 20% growth. In particular, the economy grew by 0.6% quarter-on-quarter in the first quarter, 2.6 percentage points lower than the quarter-on-quarter growth rate in the fourth quarter of 2020, indicating a slowdown in the pace of economic recovery. Taking the first quarter of 2019 as the base, China’s GDP growth averaged 5% over two years, and this is still lower than the 5.8% growth rate in the fourth quarter of 2019 before the outbreak of the COVID-19 pandemic.

Figure: China’s quarterly economic growth rate in recent years

China’s quarter-on-quarter and year-on-year economic growth rates in recent years

China’s quarter-on-quarter GDP growth rate

Source: China’s National Bureau of Statistics. Graphic: ANBOUND.

Data from the major sectors of the economy provides a more detailed picture of the economy’s performance in the first quarter.

In terms of industrial growth, in March, the value-added of the industrial enterprises above designated size grew by 14.1% year-on-year. In the first quarter, the value-added of the industrial enterprises above designated size grew by 24.5% year-on-year, up 14.0% compared with the same period in 2019, and the two-year average growth rate was 6.8%, close to the 6.9% growth rate at the end of 2019 before the outbreak of the pandemic. However, the year-on-year growth slowed to 14.1% in March, below the average market forecast of 15.4%. In particular, industrial growth slowed to a seasonally adjusted 0.6% quarter-on-quarter, the first deceleration since December 2020. Some market analysts believe that the industrial output in March did not continue the remarkably high growth in January-February is one of the reasons why the year-on-year GDP growth in the first quarter did not reach the 20% upper limit as expected by the market.

In terms of investment, from January to March, China’s fixed asset investment (excluding rural households) was RMB 9.5994 trillion, up 25.6% year-on-year and up 2.06% compared with October-December last year after seasonally adjusted; it was 6.0% higher than that from January to March in 2019, with an average growth rate of 2.9% in two years. Among them, private investment in fixed assets was RMB 5.5022 trillion (accounted for 57.3% of the total investment), up 26.0% year-on-year. On a month-on-month basis, investment in fixed assets (excluding rural households) rose 1.51% in March. By industry, the investment in the primary industry was RMB 236.2 billion, up 45.9% year-on-year; the investment in the secondary industry was RMB 2.792.9 trillion, up 27.8%; the investment in the tertiary industry reached RMB 6.5703 trillion, up 24.1%. It can be seen that the growth of investment in the first quarter has maintained relatively strong momentum. In addition to the significant year-on-year growth, investment has also maintained a significant quarter-on-quarter growth, and maintained positive growth in March.

Consumption growth, which was negative last year, turned positive in the first quarter of this year. In March, the total retail sales of consumer goods reached RMB 3.5484 trillion, a year-on-year increase of 34.2% (well above market expectations of 28%); it was 12.9% higher than that in March 2019, with an average growth rate of 6.3% in two years. After deducting price factors, the total retail sales of consumer goods in March 2021 increased by 33% in real terms, with an average growth of 4.4% in two years. On a month-on-month basis, the total retail sales of consumer goods increased by 1.75% in March. From January to March, the total retail sales of consumer goods reached RMB 10.5221 trillion, a year-on-year increase of 33.9%, with an average growth rate of 4.2% in two years; after seasonal adjustment, it increased by 1.86% compared with October to December last year. In terms of online retail sales, from January to March, China’s online retail sales reached RMB 2.8093 trillion, a year-on-year growth of 29.9% and an average growth of 13.5% in two years. Of this, online retail sales of physical goods reached RMB 2.3067 trillion, an increase of 25.8%, with an average growth of 15.4% in two years, accounting for 21.9% of the total retail sales of consumer goods. If retail consumption growth is sustained, it will provide important support for China’s economic recovery this year.

In terms of income and expenditure, the nationwide per capita disposable income has reached RMB 9,730 in the first quarter, a nominal increase of 13.7% year-on-year, with an average two-year growth of 7.0%, or a real increase of 13.7% year-on-year after deducting price factors, with an average two-year growth of 4.5%. In the first quarter, the growth rate of per capita disposable income has increased quarter by quarter, maintaining stable recovery growth, but it was still significantly lower than the economic growth rate in the same period. In terms of urban and rural areas, the per capita disposable income of urban households was RMB 13,120, a nominal increase of 12.27% year-on-year and a real increase of 12.3%; the per capita disposable income of rural households was RMB 5,398, a nominal increase of 16.3% year-on-year and a real increase of 16.3% after deducting price factors. In the first quarter, China’s per capita consumption expenditure reached RMB 5,978, a nominal increase of 17.6% year-on-year or a real increase of 17.6% after deducting price factors; it was 8.0% higher than that the first quarter of 2019 with two-year average growth of 3.9% or 1.4% after deducting price factors.

In terms of foreign trade, China’s merchandise imports and exports amounted to RMB 8.47 trillion in the first quarter of this year, up 29.2% year-on-year, according to the General Administration of Customs. Among them, exports grew 38.7% to RMB 4.61 trillion, imports grew 19.3% to RMB 3.86 trillion, and the trade surplus reached RMB 759.29 billion, an increase of 690.6%. In March, China’s dollar-denominated exports grew 30.6% year-on-year, down 30 percentage points from January-February, while dollar-denominated imports increased by 38.1%, up 15.9 percentage points from January-February. The trade surplus for the month was USD 13.8 billion, down USD 89.46 billion from January-February. In RMB terms, exports rose 20.7% in March from a year earlier, down 29.4 percentage points from January-February, while imports grew by 27.7%, up 13.2 percentage points from January-February. The trade surplus in the same month was RMB 87.98 billion, a decrease of RMB 587.88 billion. It can be seen that with the economic recovery at home and abroad, China’s imports and exports have seen significant growth. The growth rate of imports exceeds that of exports, showing the characteristic of China as the “world’s factory”.

Overall, China’s economy grew sharply in the first quarter as expected due to a low base effect. However, the growth rate was lower than the market had expected. As ANBOUND has pointed in the past, to fully understand the actual situation of China’s post-pandemic economic growth, one should look at the economic growth in the past three years as a whole. Therefore, China’s quarterly economic growth this year will be high at the beginning of the year, and it will be lower afterwards. It is expected that the economic growth over the next year or two will be significantly slower than that of this year.

It is also important to note that China can no longer be the star performer of the world’s major economies, as it was last year. As vaccines continue to roll out, the global economy will generally recover in 2021, with the U.S. economy in particular rebounding strongly. According to Federal Reserve’s officials, the U.S. economy is expected to grow by 6.5% this year, with the inflation rate rising to around 2.5% and the unemployment rate falling to around 5% by the end of the year. Other institutions expect the U.S. to be the locomotive of global economic growth this year, contributing more to global economic growth than China; the U.S. economy will still be able to grow at 3.5% by 2022.

Final Analysis Conclusion:

As both the world economy and the Chinese economy are on the track of recovery, the most crucial goal for the Chinese economy is not to pursue a single year’s growth, but to maintain stability for at least three years, while addressing its internal problems of the Chinese economy. In this regard, China’s macro policy is expected to focus on the twin goals of “stability” and “risk prevention,” and the pursuit of balanced growth.

Founder of Anbound Think Tank in 1993, Chan Kung is now ANBOUND Chief Researcher. Chan Kung is one of China’s renowned experts in information analysis. Most of Chan Kung‘s outstanding academic research activities are in economic information analysis, particularly in the area of public policy.

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Reforms Key to Romania’s Resilient Recovery

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Over the past decade, Romania has achieved a remarkable track record of high economic growth, sustained poverty reduction, and rising household incomes. An EU member since 2007, the country’s economic growth was one of the highest in the EU during the period 2010-2020.

Like the rest of the world, however, Romania has been profoundly impacted by the COVID-19 pandemic. In 2020, the economy contracted by 3.9 percent and the unemployment rate reached 5.5 percent in July before dropping slightly to 5.3 percent in December. Trade and services decreased by 4.7 percent, while sectors such as tourism and hospitality were severely affected. Hard won gains in poverty reduction were temporarily reversed and social and economic inequality increased.

The Romanian government acted swiftly in response to the crisis, providing a fiscal stimulus of 4.4 percent of GDP in 2020 to help keep the economy moving. Economic activity was also supported by a resilient private sector. Today, Romania’s economy is showing good signs of recovery and is projected to grow at around 7 percent in 2021, making it one of the few EU economies expected to reach pre-pandemic growth levels this year. This is very promising.

Yet the road ahead remains highly uncertain, and Romania faces several important challenges.

The pandemic has exposed the vulnerability of Romania’s institutions to adverse shocks, exacerbated existing fiscal pressures, and widened gaps in healthcare, education, employment, and social protection.

Poverty increased significantly among the population in 2020, especially among vulnerable communities such as the Roma, and remains elevated in 2021 due to the triple-hit of the ongoing pandemic, poor agricultural yields, and declining remittance incomes.

Frontline workers, low-skilled and temporary workers, the self-employed, women, youth, and small businesses have all been disproportionately impacted by the crisis, including through lost salaries, jobs, and opportunities.

The pandemic has also highlighted deep-rooted inequalities. Jobs in the informal sector and critical income via remittances from abroad have been severely limited for communities that depend on them most, especially the Roma, the country’s most vulnerable group.

How can Romania address these challenges and ensure a green, resilient, and inclusive recovery for all?

Reforms in several key areas can pave the way forward.

First, tax policy and administration require further progress. If Romania is to spend more on pensions, education, or health, it must boost revenue collection. Currently, Romania collects less than 27 percent of GDP in budget revenue, which is the second lowest share in the EU. Measures to increase revenues and efficiency could include improving tax revenue collection, including through digitalization of tax administration and removal of tax exemptions, for example.

Second, public expenditure priorities require adjustment. With the third lowest public spending per GDP among EU countries, Romania already has limited space to cut expenditures, but could focus on making them more efficient, while addressing pressures stemming from its large public sector wage bill. Public employment and wages, for instance, would benefit from a review of wage structures and linking pay with performance.

Third, ensuring sustainability of the country’s pension fund is a high priority. The deficit of the pension fund is currently around 2 percent of GDP, which is subsidized from the state budget. The fund would therefore benefit from closer examination of the pension indexation formula, the number of years of contribution, and the role of special pensions.

Fourth is reform and restructuring of State-Owned Enterprises, which play a significant role in Romania’s economy. SOEs account for about 4.5 percent of employment and are dominant in vital sectors such as transport and energy. Immediate steps could include improving corporate governance of SOEs and careful analysis of the selection and reward of SOE executives and non-executive bodies, which must be done objectively to ensure that management acts in the best interest of companies.

Finally, enhancing social protection must be central to the government’s efforts to boost effectiveness of the public sector and deliver better services for citizens. Better targeted social assistance will be more effective in reaching and supporting vulnerable households and individuals. Strategic investments in infrastructure, people’s skills development, and public services can also help close the large gaps that exist across regions.

None of this will be possible without sustained commitment and dedicated resources. Fortunately, Romania will be able to access significant EU funds through its National Recovery and Resilience Plan, which will enable greater investment in large and important sectors such as transportation, infrastructure to support greater deployment of renewable energy, education, and healthcare.

Achieving a resilient post-pandemic recovery will also mean advancing in critical areas like green transition and digital transformation – major new opportunities to generate substantial returns on investment for Romania’s economy.

I recently returned from my first official trip to Romania where I met with country and government leaders, civil society representatives, academia, and members of the local community. We discussed a wide range of topics including reforms, fiscal consolidation, social inclusion, renewably energy, and disaster risk management. I was highly impressed by their determination to see Romania emerge even stronger from the pandemic. I believe it is possible. To this end, I reiterated the World Bank’s continued support to all Romanians for a safe, bright, and prosperous future.

First appeared in Romanian language in Digi24.ro, via World Bank

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US Economic Turmoil: The Paradox of Recovery and Inflation

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The US economy has been a rollercoaster since the pandemic cinched the world last year. As lockdowns turned into routine and the buzz of a bustling life came to a sudden halt, a problem manifested itself to the US regime. The problem of sustaining economic activity while simultaneously fighting the virus. It was the intent of ‘The American Rescue Plan’ to provide aid to the US citizens, expand healthcare, and help buoy the population as the recession was all but imminent. Now as the global economy starts to rebound in apparent post-pandemic reality, the US regime faces a dilemma. Either tighten the screws on the overheating economy and risk putting an early break on recovery or let the economy expand and face a prospect of unrelenting inflation for years to follow.

The Consumer Price Index, the core measure of inflation, has been off the radar over the past few months. The CPI remained largely over the 4% mark in the second quarter, clocking a colossal figure of 5.4% last month. While the inflation is deemed transitionary, heated by supply bottlenecks coinciding with swelling demand, the pandemic-related causes only explain a partial reality of the blooming clout of prices. Bloomberg data shows that transitory factors pushing the prices haywire account for hotel fares, airline costs, and rentals. Industries facing an offshoot surge in prices include the automobile industry and the Real estate market. However, the main factors driving the prices are shortages of core raw materials like computer chips and timber (essential to the efficient supply functions of the respective industries). Despite accounting for the temporal effect of certain factors, however, the inflation seems hardly controlled; perverse to the position opined by Fed Chair Jerome Powell.

The Fed already insinuated earlier that the economy recovered sooner than originally expected, making it worthwhile to ponder over pulling the plug on the doveish leverage that allowed the economy to persevere through the pandemic. The main cause was the rampant inflation – way off the 2% targetted inflation level. However, the alluded remarks were deftly handled to avoid a panic in an already fragile road to recovery. The economic figures shed some light on the true nature of the US economy which baffled the Fed. The consumer expectations, as per Bloomberg’s data, show that prices are to inflate further by 4.8% over the course of the following 12 months. Moreover, the data shows that the investor sentiment gauged from the bond market rally is also up to 2.5% expected inflation over the corresponding period. Furthermore, a survey from the National Federation of Independent Business (NFIB) suggested that net 47 companies have raised their average prices since May by seven percentage points; the largest surge in four decades. It is all too much to overwhelm any reader that the data shows the economy is reeling with inflation – and the Fed is not clear whether it is transitionary or would outlast the pandemic itself.

Economists, however, have shown faith in the tools and nerves of the Federal Reserve. Even the IMF commended the Fed’s response and tactical strategies implemented to trestle the battered economy. However, much averse to the celebration of a win over the pandemic, the fight is still not through the trough. As the Delta variant continues to amass cases in the United States, the championed vaccinations are being questioned. While it is explicable that the surge is almost distinctly in the unvaccinated or low-vaccinated states, the threat is all that is enough to drive fear and speculation throughout the country. The effects are showing as, despite a lucrative economic rebound, over 9 million positions lay vacant for employment. The prices are billowing yet the growth is stagnating as supply is still lukewarm and people are still wary of returning to work. The job market casts a recession-like scenario while the demand is strong which in turn is driving the wages into the competitive territory. This wage-price spiral would fuel inflation, presumably for years as embedded expectations of employees would be hard to nudge lower. Remember prices and wages are always sticky downwards!

Now the paradox stands. As Congress is allegedly embarking on signing a $4 trillion economic plan, presented by president Joe Bidden, the matters are to turn all the more complex and difficult to follow. While the infrastructure bill would not be a hard press on short-term inflation, the iteration of tax credits and social spending programs would most likely fuel the inflation further. It is true that if the virus resurges, there won’t be any other option to keep the economy afloat. However, a bustling inflationary environment would eventually push the Fed to put the brakes on by either raising the interest rates or by gradually ceasing its Asset Purchase Program. Both the tools, however, would risk a premature contraction which could pull the United States into an economic spiral quite similar to that of the deflating Japanese economy. It is, therefore, a tough stance to take whether a whiff of stagflation today is merely provisional or are these some insidious early signs to be heeded in a deliberate fashion and rectified immediately.

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Carbon Market Could Drive Climate Action

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Authors: Martin Raiser, Sebastian Eckardt, Giovanni Ruta*

Trading commenced on China’s national emissions trading system (ETS) on Friday. With a trading volume of about 4 billion tons of carbon dioxide or roughly 12 percent of the total global CO2 emissions, the ETS is now the world’s largest carbon market.

While the traded emission volume is large, the first trading day opened, as expected, with a relatively modest price of 48 yuan ($7.4) per ton of CO2. Though this is higher than the global average, which is about $2 per ton, it is much lower than carbon prices in the European Union market where the cost per ton of CO2 recently exceeded $50.

Large volume but low price

The ETS has the potential to play an important role in achieving, and accelerating China’s long-term climate goals — of peaking emissions before 2030 and achieving carbon neutrality before 2060. Under the plan, about 2,200 of China’s largest coal and gas-fired power plants have been allocated free emission rights based on their historical emissions, power output and carbon intensity.

Facilities that cut emissions quickly will be able to sell excess allowances for a profit, while those that exceed their initial allowance will have to pay to purchase additional emission rights or pay a fine. Putting a price tag on CO2 emissions will promote investment in low-carbon technologies and equipment, while carbon trading will ensure emissions are first cut where it is least costly, minimizing abatement costs. This sounds plain and simple, but it will take time for the market to develop and meaningfully contribute to emission reductions.
The initial phase of market development is focused on building credible emissions disclosure and verification systems — the basic infrastructure of any functioning carbon market — encouraging facilities to accurately monitor and report their emissions rather than constraining them. Consequently, allocations given to power companies have been relatively generous, and are tied to power output rather than being set at absolute levels.

Also, the requirements of each individual facility to obtain additional emission rights are capped at 20 percent above the initial allowance and fines for non-compliance are relatively low. This means carbon prices initially are likely to remain relatively low, mitigating the immediate financial impact on power producers and giving them time to adjust.

For carbon trading to develop into a significant policy tool, total emissions and individual allowances will need to tighten over time. Estimates by Tsinghua University suggest that carbon prices will need to be raised to $300-$350 per ton by 2060 to achieve carbon neutrality. And our research at the World Bank suggest a broadly applied carbon price of $50 could help reduce China’s CO2 emissions by almost 25 percent compared with business as usual over the coming decade, while also significantly contributing to reduced air pollution.

Communicating a predictable path for annual emission cap reductions will allow power producers to factor future carbon price increases into their investment decisions today. In addition, experience from the longest-established EU market shows that there are benefits to smoothing out cyclical fluctuations in demand.

For example, carbon emissions naturally decline during periods of lower economic activity. In order to prevent this from affecting carbon prices, the EU introduced a stability reserve mechanism in 2019 to reduce the surplus of allowances and stabilize prices in the market.

Besides, to facilitate the energy transition away from coal, allowances would eventually need to be set at an absolute, mass-based level, which is applied uniformly to all types of power plants — as is done in the EU and other carbon markets.

The current carbon-intensity based allocation mechanism encourages improving efficiency in existing coal power plants and is intended to safeguard reliable energy supply, but it creates few incentives for power producers to divest away from coal.

The effectiveness of the ETS in creating appropriate price incentives would be further enhanced if combined with deeper structural reforms in power markets to allow competitive renewable energy to gain market share.

As the market develops, carbon pricing should become an economy-wide instrument. The power sector accounts for about 30 percent of carbon emissions, but to meet China’s climate goals, mitigation actions are needed in all sectors of the economy. Indeed, the authorities plan to expand the ETS to petro-chemicals, steel and other heavy industries over time.

In other carbon intensive sectors, such as transport, agriculture and construction, emissions trading will be technically challenging because monitoring and verification of emissions is difficult. Faced with similar challenges, several EU member states have introduced complementary carbon taxes applied to sectors not covered by an ETS. Such carbon excise taxes are a relatively simple and efficient instrument, charged in proportion to the carbon content of fuel and a set carbon price.

Finally, while free allowances are still given to some sectors in the EU and other more mature national carbon markets, the majority of initial annual emission rights are auctioned off. This not only ensures consistent market-based price signals, but generates public revenue that can be recycled back into the economy to subsidize abatement costs, offset negative social impacts or rebalance the tax mix by cutting taxes on labor, general consumption or profits.

So far, China’s carbon reduction efforts have relied largely on regulations and administrative targets. Friday’s launch of the national ETS has laid the foundation for a more market-based policy approach. If deployed effectively, China’s carbon market will create powerful incentives to stimulate investment and innovation, accelerate the retirement of less-efficient coal-fired plants, drive down the cost of emission reduction, while generating resources to finance the transition to a low-carbon economy.

(Martin Raiser is the World Bank country director for China, Sebastian Eckardt is the World Bank’s lead economist for China, and Giovanni Ruta is a lead environmental economist of the World Bank.)

(first published on China Daily via World Bank)

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