Wall Street Frontline｜Understanding China's Growth Drivers: Insights from Nicholas Lardy

（原标题：Wall Street Frontline｜Understanding China's Growth Drivers: Insights from Nicholas Lardy）

According to the International Monetary Fund, China's economic growth rate is projected to be 5% in 2024, which is an upward adjustment of 0.4 percentage points from their April 2024 forecast. This revision is largely attributed to stronger-than-expected consumer activity and a resilient trade sector in the fourth quarter of the year.

Concurrently, the 20th Central Committee of the Communist Party of China holds its third plenary session in Beijing from July 15th to 18th, 2024. This session emphasized the importance of high-quality development, expanding domestic demand, and further opening up.

To dive deeper into these topics, we invited Nicholas Lardy, a prominent economist and a Senior Fellow at the Peterson Institute for International Economics, to interpret the recent economic data and the main messages from the 20th third plenary session.

Wall Street Frontline: Hi, Nicholas. Thank you so much for joining us.

Nicholas Lardy: You’re welcome. I am looking forward to it.

Wall Street Frontline: The International Monetary Fund (IMF) released on Tuesday an update to its World Economic Outlook, predicting that China's economic growth rate will be 5 percent in 2024, an upward revision of 0.4 percentage points from the forecast in April. Are there specific industries within China that you expect to outperform based on the IMF's updated outlook?

Nicholas Lardy: I think the main factor underlying this revised IMF outlook is the data that the authorities released for the first quarter in China. Their April forecast didn't have the advantage of knowing what the result was for the first quarter. When they saw the first quarter results and analyzed them, they raised their estimate. I think the most important component was the fact that private consumption growth was relatively strong, much stronger than GDP growth. And I think that led them to raise the forecast. They also noticed that the trade sector was doing better than expected. And that, of course, feeds into manufacturing, since most of China's exports are manufactured goods.

Wall Street Frontline: Recently, one of the most important events in China is the 20th third plenary session. It was held in Beijing from July 15 to July 18. So as you just mentioned, the plenum highlighted the need to actively expand domestic demand. So what are your thoughts on this?

Nicholas Lardy: I think, in fact, consumption growth has been very strong. Consumption growth has exceeded the growth of disposable income, both in the first quarter and in the second quarter of this year. The second quarter data just came out a few days ago. And what does that mean? Well, the only way households can increase their spending more rapidly than their income is if their savings rate is going down. Of course, they're still saving large amounts, but the share of their income that they're saving is going down. And I think that suggests that households have confidence. This idea about a consumer malaise and lack of consumer confidence I don't think is borne out by the data. Consumption has been relatively strong, and it has accounted for a relatively large share of growth in 2024 so far.

Wall Street Frontline: The meeting also emphasized accelerating new dynamics in foreign trade. From an international perspective, how do you think the direction of new dynamics in foreign trade will affect China's global economic relationships and economic development?

Nicholas Lardy: I think China is in a very challenging environment, given all the restrictions that the United States and some of their countries have placed on trade with China, both imports from China and exports to China, exports of technology, and so forth. But despite this set of restrictions, China's trade has continued to perform relatively well. There's been a substantial redirection of trade. Southeast Asian countries have become relatively more important, whereas trade with the United States, which historically had been very important, at least direct trade with the United States, has declined. So I think we're seeing a lot of flexibility on Chinese companies engaged in international trade. And I would say this should not be a surprise, because most of China's trade now is undertaken by private companies or foreign-invested companies. These companies tend to be able to respond more quickly to changing global environment. State companies, which in many cases are not so flexible, only account for about 10 percent of China's trade. It's very heavily dominated by domestic private companies and foreign affiliates operating in China. So I think people that don't take that into account tend to underestimate the potential for trade to continue to play a significant role in China's growth.

Wall Street Frontline: The meeting also focused on a further opening up of China's economy. So which sectors are most likely to see significant changes in your opinion?

Nicholas Lardy: Most conventional manufacturing is open to foreign investment, and we can see that in the share of manufactured goods that are produced by foreign affiliates in China. The share of manufactured goods produced by foreign affiliates is among the highest of any country in any major economy in the world, which I think shows fairly dramatically that the manufacturing sector is open. In services, it's a more complicated story. In the financial sector, over the last couple of years, there's been a substantial liberalization. So foreign financial institutions have been able to establish wholly foreign-owned securities businesses, insurance businesses, asset management businesses, and so forth. So the old requirement that all this foreign activity had to take place in the context of joint ventures with domestic firms has largely evaporated.

Wall Street Frontline: Looking ahead in the long term, what are the expectations for China's economic development maybe like in the 3 to 5-year horizon?

Nicholas Lardy: I think it is going to take quite some time to deal with the necessary correction in the property sector. I think a lot of analysis has been quite unrealistic, arguing that the government should be doing more to revive the property sector. I think the correction in the property sector was started directly by the government, and I think they're going to see this through. They recognize that there's been overinvestment in property. They don't want to re-stimulate this sector. What they want to do is get those households and families that have purchased houses and have not yet been able to take possession, they want the development companies to finish the pre-sold but not completed projects. And I think what we're seeing is a gradual adjustment. If you look at things like new starts, how many new projects are developers undertaking, it's down dramatically. It's heading towards what will be a more sustainable level, that is the kind of level that will roughly meet demand for new properties. In the last few years before correction began in 2022, new starts were far too high, far in excess of any realistic expectation that they could all be sold. This is a long answer, but I'm sorry. I think property will continue to be a drag on the economy for the next two to three years. But once we move through that process, I think China should be able to sustain growth of at least 5%, perhaps something closer to 6%.

Wall Street Frontline: What will be the main drivers to sustain this 5% to 6% growth?

Nicholas Lardy: I think the main driver will be consumption. The consumption share of GDP has been rising, and I think it will continue to rise for a very simple reason. Most people have not focused on the fact that the growth of household income has exceeded the growth of the underlying economy now for quite a few years, and that continues in the first half of this year. So if you have an environment in which household income is growing more rapidly than GDP, that is the most important condition under which consumption can play a greater role. If you look at other major economies in the world, in almost all of them, the household income share of GDP is going down. So China is an outlier in this case in a favorable direction. I think this is likely to continue for the simple reason that the working age population is shrinking. The demand for labor is still rising. So I think wages will continue to grow. Transfer payments to households are growing more rapidly than GDP as well. So that is the main reason I think consumption will play a growing role over the next three to five years.

Wall Street Frontline: Looking at the shorter term, what is your outlook and expectation for China's economy in the second half of 2024?

Nicholas Lardy: It will be something in the neighborhood of 5%. It may be a little bit more. It may be a little bit less. And I think it's a very good thing that the authorities have not been issuing forecasts of the absolute growth rate. They'd rather say something around a certain percent. And I think there's a recognition that the sustainability of growth, the quality of growth are both more important than whatever the headline number is. And in the long term, whether the growth is 4.8, 4.9, 5 or 5.1 isn't that significant for China's long-term development. So I think, if I may say so, some people in the markets get too excited about the absolute growth rate. I say, just ignore everything that's to the right of the decimal point. It doesn't matter whether it's 5.1 or 5.2 or 5.3. If it's around 5%, that's what we should be focusing on.

出品：南方财经全媒体集团 

栏目策划：于晓娜

栏目统筹：向秀芳

出镜记者：周蕊 

翻译&制作：周蕊 段伊航（实习生）

设计：林军明 廖苑妮