Consumption, investment can spur future growth

Looking into the fourth quarter, China's economic growth may face some slowdown risks, with wider divergence of the consumer price index and the producer price index indicating inflation levels at the consumer as well as production ends.

In terms of exports, third-quarter data were optimistic, while the actual export situation showed some negative signs. A subindex of the purchasing managers' index, or the PMI, for new export orders has fallen for six consecutive months to 46 in October, which was significantly lower than 50－a reading that separates expansion from contraction.

There are two reasons for this contraction. One is that the overseas COVID-19 pandemic situation has been gradually coming under control, resulting in a greater recovery of production. Another is the rise in transportation expenses and raw material prices that reduced the willingness of enterprises to accept new orders.

From the perspective of exports, Customs' declaration data lags behind new order statistics by about a quarter. Thus, the subindex for new export orders under the PMI was weaker than the export data. Although large enterprises are more resilient in the face of pressure, small and medium-sized firms are more fragile.

Considering consumption, one of the basic issues is that low-income groups earned less. Meanwhile, in the first half of 2020, the government adopted policies to protect market entities, which had great impact on various fields.

Since the outbreak of the COVID-19 pandemic, there were discussions on different ways of supporting economic growth. Some views focused on stimulating demand, boosting consumption and the real estate market. Others, however, preferred to protect market entities. Ultimately, the latter prevailed.

Under such a principle, policies of reducing taxes and fees, renewing loans without repayment of principal, and leveraging direct monetary policy tools have supported smaller businesses, preventing large-scale bankruptcies and liquidations. So, inflation at the production end could not transfer into the consumption space when demand has not yet been strongly stimulated.

As the government will take strict measures to control the pandemic in the following months, and reinforce its zero-COVID strategy, it will restrict the movement of people and have an impact on consumption to some extent. Overall, the downward trend of economic growth may become more glaring.

In terms of investment, regulatory policies might have constrained real estate and infrastructure investment. Controlling local government debt is a key factor that can influence infrastructure investment. The reserve projects of local governments are relatively few and the willingness of local government officials decreases as they are facing a lifelong accountability system that cannot tolerate an increase in cumulative debt.

For this year's fiscal budget, the government's arrangement of funds focuses on two major fields－healthcare and social security－and less so on infrastructure construction. Local government special bonds have higher requirements for projects, and issuers were reluctant to issue such bonds in early stages. Recently, the government adjusted funds of special bonds every week, aiming to ease debt pressure of local governments rather than implement countercyclical measures to boost investment.

In the real estate market, the policy of "Three Red Lines" to control loans for property developers and mortgages has constrained some trading. Other real estate data, such as sales, new construction and investment, showed a softening trend, and the willingness of real estate enterprises to purchase land has also weakened significantly.

Given such a situation, there will be downward pressure on investment in the near future. Overall, authorities are unlikely to make large-scale and short-term policy adjustments in the fourth quarter. Compared with the GDP growth rate of 4.9 percent in the third quarter, the GDP's reading in the last three months of this year may drop by about 1 percentage point.

In the future, China can spur economic growth from both consumption and investment. In terms of consumption, measures are different over the short term and for the long term. In the long run, measures should be based on "common prosperity" policies, which focus on improving incomes of low and middle-income groups, thus gradually boosting consumption.

In the short term, some consumption vouchers can be used. Food and clothing are the weakest components in consumption so far. The incentive effect on consumption brought by issuing consumption vouchers for such income groups is more obvious.

In terms of investment, previously in China, economic development is dependent on highly leveraged real estate and infrastructure sectors. New growth points should be found in the future.

Carbon neutrality could be one of the driving forces of a new type of growth model, which involves reconstruction of many industries.

Among them, one is the reconstruction of the industrial chain in the new energy industry, from new energy vehicles to batteries and electrolytes, and even the entire chemical sector.

Looking ahead, such reconstruction in new energy will push forward that of China's whole industrial system, which is a very important field for the future. However, this will need two pillars to support its vitality.

First, at the monetary and credit level, monetary policy tools for carbon emissions reduction to be launched by the central bank will be normalized in the future, and the amount of investment will gradually increase.

Adopting the "Three Red Lines" will be helpful to appropriately control debt levels in the real estate sector, while manufacturing enterprises can moderately increase some leverage so they can put more credit into carbon emissions reduction projects.

Second, controlling total energy consumption and intensity could be contradictory with the goals of carbon neutrality, which needs to be solved. For example, the development of silicon supports carbon neutrality, but carbon emissions or energy consumption involving this sector are relatively high, which should be temporarily liberated through exemption or other mechanisms.

The faster the promotion in this area, the speedier the development of new energy substitutions in the lower-stream sectors of the industry. Investment will be improved, which will play an important role in stabilizing growth.

The writer is chief economist at Zheshang Securities.

The views don't necessarily reflect those of China Daily.