Dual-circulation paradigm to be key driving force

China's economy is likely to center on one word next year, stability－identified as the top priority at a recent tone-setting meeting attended by top policymakers in Beijing.

According to analysts, while the emphasis on stability is nothing new in the nation's economic policy, prioritizing stable growth does not mean returning to the old development path.

They said pushing high-quality growth and accelerating construction of a new development pattern, with the dual-circulation policy as the core idea to fully unleash the economy's potential, will continue to be a key theme of economic policy next year.

This development model means that domestic circulation, or the internal cycle of production, distribution and consumption, will be the mainstay of economic development. The domestic and foreign markets, or international circulation, will reinforce one another to promote the smooth, two-way flow of goods and capital. The dual circulation idea was first put forward in May last year by the central leadership.

Attention is now focusing on how policymakers will tackle near-term headwinds to shore up growth without sacrificing long-term goals of pushing high-quality expansion through structural reforms and fostering a more equal and inclusive economy by promoting common prosperity.

Last year, China was the only major economy to avoid a recession and achieve positive GDP growth amid the COVID-19 pandemic. This strong recovery continued this year, with the economy on track to meeting government targets and forecast by economists to expand by about 8 percent year-on-year.

Han Wenxiu, a senior official with the Central Committee for Financial and Economic Affairs, said China's GDP this year is expected to exceed 110 trillion yuan ($17.3 trillion), while GDP per capita is likely to surpass $12,000, moving closer to the threshold of a high-income economy defined by the World Bank.

Meanwhile, consumer inflation in China this year is expected to rise by less than 1 percent, in contrast to record-high figures in advanced economies. More than 12 million new jobs in urban areas will likely be created this year, with the surveyed unemployment rate standing at around 5 percent.

However, economic recovery has not been plain sailing, with a series of challenges weighing heavily on the nation's growth momentum from the second half of the year.

GDP growth slowed in the third quarter to 4.9 percent year-on-year and may further decelerate in the fourth quarter to about 3 percent, according to economists' predictions. Such a slowdown had not been expected, since the economy saw an 18.3 percent rebound year-on-year in the first quarter.

Adverse factors dragging down economic growth include a series of COVID-19 outbreaks that have dented the recovery of domestic consumption, especially activities in the offline services sector. There has also been a faster-than-expected slowdown in the property market, posing a threat to the country's financial stability, along with a shortage of semiconductors, and an energy crunch that hampered industrial production. In addition, soaring raw material prices have eaten into corporate profits.

Overseas uncertainties have also clouded prospects for the economy, with Chinese officials and economists fearing that disruptions to the global supply chain, unstable external demand and an end to ultra-loose policies in developed economies to curb rapidly rising inflation could have negative spillover effects.

Demand potential

At the Central Economic Work Conference in Beijing this month, as top policymakers mapped out objectives for next year, they suggested stepping up fiscal stimulus measures and accelerating public spending and the issuance of local government bonds to better unleash domestic demand potential.

Ning Jizhe, deputy head of the National Development and Reform Commission, said there is still insufficient domestic demand, which means the potential for this must be fully explored next year.

Increased infrastructure investment and additional tax and fee cuts for companies can be expected next year. The government will expand effective investment in programs such as new infrastructure, new urbanization, hydropower and transportation projects, and speed up progress in other projects outlined in the 14th Five-Year Plan (2021-25), Ning said.

The budget deficit will likely widen by about 130 billion yuan next year and the government will probably set the target for this shortfall at around 3 percent for 2022, with a total deficit of some 3.7 trillion yuan, according to estimates by the Chinese Academy of Social Sciences, or CASS, a government think tank.

The academy predicts that investment growth next year will further accelerate, with infrastructure investment being the main driver and likely to grow by 5 percent year-on-year, up from an estimated 0.3 percent this year.

Meanwhile, according to analysts at investment bank China International Capital Corporation, or CICC, the total value of tax and fee reductions is forecast at about 1.5 trillion yuan next year, up from an estimated 1.2 trillion yuan this year.

Economists said recovery momentum for the economy is likely to shift, being driven more by domestic－rather than external－demand, even though the country saw strong export growth of more than 20 percent this year.

Yu Miaojie, deputy dean of Peking University's National School of Development, said implementing the dual-circulation model is key to China successfully building a unified domestic market and better unleashing domestic demand potential.

"The central leadership has given a clear policy signal that the core competitiveness of the economy is no longer the comparative advantage of its labor cost, but the huge and unified domestic market," Yu said.

"Nourishing a strong home market to better unleash its potential is crucial for China to achieve high-quality growth and build a new development pattern," Yu said.

Kristina Hooper, chief global market strategist at asset management company Invesco, said improving people's well-being and promoting common prosperity will remain key themes in the government's policy for the foreseeable future, which could boost domestic consumption, especially among lower-middle income groups.

Kang Yong, chief economist at KPMG China, said the nation's household consumption will further recover next year, but the pace of this improvement could still be affected by measures taken to control the pandemic.

Consumption in China remains resilient, and the improved job market has laid a solid foundation for this recovery, Kang said, adding that development of urbanization and policies to promote common prosperity and improve social welfare will strongly support mid- to long-term domestic consumption growth.

Analysts expect monetary policy next year to remain prudent and flexible as the People's Bank of China, the central bank, will act dynamically and respond quickly to changing conditions to ensure sufficient market liquidity.

In a research note, analysts at CICC said, "We expect China's monetary policy to be flexibly adjusted according to the economic situation and credit market conditions." Policy would focus on encouraging financial institutions to offer stronger credit support to smaller companies and sectors related to technology innovation and green development, they said.

Risks to be contained

The property market slowdown has been a focal point, as analysts have identified it as a major risk that could threaten economic recovery if not tackled well. The debt crisis at property developer China Evergrande Group triggered concerns that it may lead to a potentially wider crisis in the sector.

While curbs on property speculation will remain, the top leadership has vowed to foster a stable and healthy property development market by exploring new models and pushing construction of more housing projects for low-income families.

The property sector has a long supply chain and accounts for a large proportion of the economy, fixed-asset investment, local government income and financial institutions' loans. As the sector is significant for the economy and financial stability, analysts said policies should aim to prevent a hard landing.

Zhang Bin, a senior researcher with financial think tank the China Finance 40 Forum, said in a note, "Preventing a hard landing in the property sector is about preventing a liquidity crisis among developers and ensuring their cash flow."

Policies should also help boost financing growth in other key sectors and enrich their cash flows to prevent the slowdown in the property market spreading, he added.

Chen Dong, head of Asia macroeconomic research at Swiss company Pictet Wealth Management, said that while the property slowdown could have a negative impact on China's overall economic growth, the threat to the nation's financial system can be controlled, as the quality of domestic mortgage loans is relatively high.

Analysts said local government debt is another risk closely associated with the property market, adding that the downturn could reduce land sales revenue for local administrations and put pressure on their income.

The top leadership has pledged to resolutely contain growth of hidden local government debt. While stabilizing growth has been a policy priority, resolving financial risks arising from such debt will continue to be an objective next year, the analysts said.

CASS researchers said in a paper that as the property market would continue to face pressure next year, local government income from land sales would likely see challenges, which could directly affect their fiscal strength and increase their debt risks.

Policy coordination

Analysts said the top leadership has emphasized the need for better policy coordination to support economic development. Policy fine-tuning and improved implementation in key sectors can be expected, and to avoid unintended negative consequences for the economy, there are likely to be fewer regulatory surprises in fields such as anti-monopoly, deleveraging and decarbonization.

Han, from the Central Committee for Financial and Economic Affairs, said the government should be cautious about unveiling policies that could lead to the economy contracting. It should also avoid introducing policies that are reasonable individually but which could have a negative impact as a whole, he added.

CASS researchers suggested the government should further strengthen coordination among various cities, regions and industries to prevent policies contradicting or constraining each other or having a combined negative impact.

Analysts at Goldman Sachs said in a research note: "The broader direction of many of the policy initiatives such as property deleveraging and decarbonization will not change, in our view. However, we expect both improved implementation of these long-term policies and 'less tight but not loose' cyclical policies in 2022 amid downward pressure on growth."

Chaipat Poonpatpibul, lead economist at the ASEAN+3 Macroeconomic Research Office, said that while tight macro and prudent policy measures in the real estate sector are appropriate at this time, some flexibility in implementation could be considered.

He said this would avoid significant spillover effects from adverse events and significant price corrections and sharp contractions in transactions in the near term, while improving the health of the real estate sector in the longer term.

Poonpatpibul added that adverse transitional effects associated with climate change mitigation efforts such as carbon reduction need to be managed carefully.

"Fiscal support is needed for poorer regions heavily reliant on carbon-based economic activities. The social safety net has to be strengthened further to help workers and vulnerable groups affected by industrial restructuring or the impact of higher energy prices," he said.