The Bank of Korea: "China's Growth Rate Around 5% This Year... Gradual Recovery in the Second Half"

Expectations for Active Fiscal and Monetary Policies by Chinese Authorities

The Bank of Korea forecasted that the Chinese economy would achieve a growth rate of around 5% this year, supported by the government's proactive fiscal and monetary policies. Although the reopening effect (resumption of economic activities) weakened faster than expected across all sectors including production, consumption, and investment in the second quarter, it is expected that the Chinese economy will show a gradual recovery in the second half of the year as policy support expands to boost domestic demand, stabilize employment, and manage risks.

On the 6th, the Bank of Korea stated in its Overseas Economic Focus report titled "Second Half Outlook for the Chinese Economy and Key Issues" that "the recovery of domestic demand such as consumption and investment is slow due to the lack of restored confidence in the Chinese economy among economic agents such as households and businesses, and concerns about export slowdown remain high," adding that "a rapid recovery is unlikely."

It analyzed that the Chinese economy faces downside risks to growth both domestically, due to sluggish real estate markets and concerns over local government debt risks, and externally, due to increased financial market volatility stemming from prolonged US-China tensions and the Ukraine crisis.

Specifically, consumption is expected to gradually improve as consumer sentiment recovers with the help of Chinese government policy support, but the pace of recovery is projected to be moderate. However, the report noted that it would be difficult to significantly expand employment in the short term due to structural and frictional unemployment issues such as high youth unemployment rates, and there are concerns that residents' incomes will improve slowly. It also analyzed that the scars from experiencing COVID-19 under stringent quarantine policies like long-term regional lockdowns have led economic agents to be cautious about consumption using excess savings, which will affect the speed of consumption recovery.

Fixed asset investment is expected to continue moderate growth centered on infrastructure and manufacturing investments, but real estate development investment is projected to remain sluggish for the time being. While infrastructure investment is important for stable growth amid slow consumption recovery, the policy capacity is limited due to increasing local government debt, making it difficult for infrastructure investment to show significant growth.

Exports and imports are expected to continue sluggishness following the first half of the year. Exports are anticipated to remain weak due to subdued demand amid tightening policies by major central banks including the US Federal Reserve (Fed), and ongoing negative impacts from geopolitical risks such as US-China conflicts and the Russia-Ukraine war causing fragmentation. However, exports to ASEAN member countries under the Regional Comprehensive Economic Partnership (RCEP), which came into full effect last year, as well as to Russia and other Belt and Road Initiative countries, are expected to continue increasing. Imports are projected to remain weak due to global economic slowdown leading to lower raw material prices, US semiconductor export restrictions on China, and reduced intermediate goods imports caused by export sluggishness.

Consumer prices are expected to show a moderate upward trend in the second half of the year, with an annual inflation rate below 1%. While demand for goods and services is expected to recover in the second half, exerting upward pressure, high youth unemployment and falling producer prices are anticipated to act as downward pressures.

The Bank of Korea stated, "Fiscal policy will expand in scale and intensity according to the targets set at the beginning of the year to respond to downward pressure on the economy," adding, "Since expanding domestic demand and recovering consumption are important for economic revitalization, various policy supports for employment stabilization, income increase, and consumption promotion are expected." It explained that local governments will issue dedicated bonds to accelerate key projects of the 14th Five-Year Plan, while promoting investments in new and renewable energy, science and technology sectors, balanced development between urban and rural areas, and new urbanization strategies. It further added, "Monetary policy will be operated more accommodatively, including lowering reserve requirement ratios, as concerns about fiscal sustainability and soundness are repeatedly raised during future economic stimulus efforts by the People's Bank of China."

This content was produced with the assistance of AI translation services.