China eyes investment, consumption growth after optimizing COVID-19 rules

China's recent guideline focusing on the expansion of domestic demand is a significant effort to boost the economy after years of being impacted by COVID-19, and is expected to increase consumption, which is seen as an important fulcrum for recovery this year, experts and analysts said.

Jointly released in mid-December by the Communist Party of China Central Committee and the State Council, China's Cabinet, the guideline laid out measures to boost domestic demand and set targets to be reached by 2035. These include raising the overall scale of consumption and investment to new heights, and establishing a sound domestic demand mechanism.

The guideline stated that by 2035, new levels of industrialization, informatization, urbanization and agricultural modernization will have been achieved. In addition, livelihoods will have been improved, and China's advantages in terms of global economic cooperation and competition will have been enhanced.

To achieve these goals, efforts will be made to boost investment in consumption, optimize the current distribution pattern, make supply-side improvements and stabilize economic circulation during the 14th Five-Year Plan (2021-25) period.

Boosting domestic demand will help the country pursue higher-quality economic growth and cope with external risks and challenges, the guideline stated.

As this year also marks China's emergence from the impact of COVID-19 and in which economic activities are returning to normal, experts and market analysts see the guideline as a strong boost to both short- and long-term recovery.

Gao Ruidong, chief macroeconomist at Everbright Securities, said that the new guideline will boost growth and the economy by enhancing the fundamental roles of consumption and investment and improving the quality of supply.

"On the consumption front, we believe based on what's said in the guideline, that the key to expanding consumption lies in services and in expanding new and green consumption. Regarding investment, we believe that technological upgrades and new infrastructure are key to keeping investments stable," he said.

"And in terms of the supply side, we believe efforts will be made to develop new products that satisfy new demand, to preserve food safety and to maintain stability in production and supply chains."

Specifically, the guideline stated that steps will be taken to increase infrastructure investment in energy, transport, logistics and water conservancy, as well as in 5G, AI and big data, and that more funding will be channeled into the advanced manufacturing sector.

Gao said that the timing of the guideline is significant because weakening domestic demand has been a major obstacle to China's economic recovery since the second half of last year. A clear policy signal toward greater investment in the aforementioned fields is expected to quickly generate investment this year.

"We've noticed that the optimization of pandemic control measures since late last year has created an enabling environment for the recovery of domestic demand," he said. "But at the same time, external demand is being hampered by high inflation overseas and the rising risks of a global recession. Declining international demand may hinder exports from China, therefore the growth of domestic demand is extra important to this year's recovery."

China's economy has been on a fast track to recovery since late December. Consumer inflation last month accelerated as the country reopened its borders, and the Lunar New Year holiday notably spurred demand, with the consumer price index growing by 2.1 percent from a year earlier.

In addition, while consumer prices are expected to pick up this year as the economy recovers, most analysts don't expect China to face the inflation that the US and other countries did when they began to relax COVID-19 restrictions.

The guideline also stressed the need to improve the quality of supply to better meet demand, perfect the modern market and circulation systems to facilitate the link between production and demand, and deepen reform and opening-up to strengthen the growth momentum of domestic demand.

Considering the challenges growth faces globally, economists point out that macroeconomic policies also need to be factored in to effectively lift domestic demand this year. For example, fiscal and financial policies working in sync will better spur investment.

"Expanding investment will help China shore up weak links in development, keep employment broadly stable and boost consumption. This year, fiscal and financial policies need to work in synergy to catalyze investment through means such as financial subsidies and interest discounts, so that the role of financial tools in generating investment can be better brought into play and more funds go toward investment," said Yang Zhiyong, a researcher with the Chinese Academy of Social Sciences.

"Also, the coordination of fiscal, financial, taxation, industrial and technology policies need to be enhanced so that the quantity and quality of effective investment will increase."

By Zhang Yue