I. The embodiment of “stability” in the Report on the Work of the GovernmentOn 5 March 2022, Premier Li Keqiang delivered the Report on the Work of the Government (hereafter referred to as “the Report”) at the Fifth Session of the 13th National People’s Congress, reviewing China’s achievements and challenges in&\\;nbsp\\;all&\\;nbsp\\;areas of work in the past year and making plans for this year’s work. In the Report, expressions regarding the word “stability” have attracted widespread attention from all walks of life at home and abroad. From a comprehensive perspective, the connotation of “stability” for this year’s economic work in the Report is mainly reflected in the following aspects.1. “Stability” of economic growth rate. The national economic growth target for 2022 is&\\;nbsp\\;set&\\;nbsp\\;at&\\;nbsp\\;5.5%, which is not only 2.6 percentage points lower than last year’s actual growth rate, but also 0.6 percentage point lower than last year’s projected growth rate of 6.1%. In 2021, despite the fact that many domestic and foreign institutions expected China to achieve a growth rate of 8%-8.5%, China still set the projected economic growth rate at 6%. Therefore, the “stability” of projected growth rate this year is a continuation of last year’s trend, reflecting the central government’s prudent attitude towards the complex environment confronting China’s economy this year. At present, both the domestic epidemic and the international situation have become more uncertain, while the recovery of domestic economic growth is also facing certain resistance. In this context, it is undoubtedly wise to avoid triumphant progress and choose to play it safe.2. “Stability” of ensuring the public well-being. It is easy to see that each of the government’s work tasks for 2022, as set out in the Report, includes sub-tasks concerning the public well-being. Ever since “stability on the six fronts” and “security in the six areas” were proposed at meetings of the Political Bureau of the CPC Central Committee held respectively on July 31, 2018 and April 17, 2020, “stability” and “security” have become the way of thinking and implementation for China in response to the high level of uncertainty. The impact of the epidemic will cause enterprises to close down or shut down, resulting in the loss of employment and hence source of income. Besides, changes in the international configuration will lead to higher raw material prices or the supply interruption of key components, resulting in higher prices and other problems. Those most affected by these shocks are often the low-income groups. Therefore, at this critical juncture of great uncertainty, the Report makes it clear that this year the government will ensure the public well-being in many aspects, including employment, food, energy, ecology and public services, etc., which will help to fundamentally reduce the likelihood of systemic risks.3. “Stability” of government’s indebtedness. As indicated by the Report, the deficit-to-GDP ratio for this year is 2.8%, down 0.4 percentage point from 3.2% last year. However, this does not mean that government expenditures&\\;nbsp\\;will fall this year. According to the Report, financial expenditures this year will be increased by more than two trillion yuan over last year. The gap in between will be filled by the surplus profits of designated state-owned financial institutions and state monopoly business operations and funds transferred from the Central Budget Stabilization Fund. In fact, Premier Li Keqiang said early&\\;nbsp\\;at the 2019 Press Conference of the NPC &\\; CPPCC Sessions that the government could not tighten&\\;nbsp\\;its belt only by squeezing expenditures, but also by taking back&\\;nbsp\\;funds that have long stayed unused, i.e., the profits turned&\\;nbsp\\;in by designated financial institutions and enterprises directly under the central government. By doing so, the government was able to increase financial expenditures and increase support for the economy without increasing, or even reducing, the budgetary deficit if necessary.II. The reason why the key to stabilizing growth lies in boosting domestic demandThe most straightforward and easy way to distinguish between domestic demand and foreign demand is to consider consumption and investment, two of China’s three growth drivers, as domestic demand, and net exports, the third driver, as foreign demand. According to the data published in the Statistical Communiqués on the National Economic and Social Development&\\;nbsp\\;for 2019, 2020 and 2021, exports contributed 11%, 30.4% and 21% respectively to economic growth in these three years. The corresponding contribution of domestic demand, i.e., consumption plus investment (final consumption expenditure and gross capital formation in the national economy accounting), to economic growth was 89%, 69.6% and 79% respectively. It is easy to see that the contribution of exports to China’s economic growth after the epidemic is much higher than before the epidemic. In 2021 the contribution of consumption, investment and net exports to economic growth was&\\;nbsp\\;65.4%, 13.6% and 21% respectively\\; exports overtook investment as the second largest driver of China’s economic growth, which was a new development.The significant increase in the contribution of China’s exports to economic growth over the last two years is clearly linked to the surge in demand for epidemic prevention materials abroad following the epidemic and the difficulty in sustaining production supply chains in a large number of regions around the world. Since the beginning of this year, there has been a worldwide trend to loosen epidemic controls. If this is generally accepted, it will mean a decline in global demand for epidemic prevention materials and a corresponding reduction in other countries’ reliance on Chinese products as supply chains recover. As a result, the contribution of exports to China's economic growth is at risk of declining this year, which means that domestic demand is duty-bound to become the main driver of support for China’s economy to avoid large fluctuations in economic growth.III. Key issues regarding boosting domestic demandSeen from the data for the two years 2020 and 2021, consumption and investment, which constitute domestic demand, both experienced relatively large fluctuations in the previous two years. Owing to the impact of the epidemic, the contribution of consumption to economic growth fell sharply in 2020 compared to the previous year, to -21.7%. In addition to the contribution of exports, which rose to 30.4% that year from 11% in 2019 and played an important role in driving economic recovery, the role of investment was even more crucial, with its contribution to growth reaching 91.3%. By 2021, however, the contribution of both consumption and investment to growth saw a sharp turn, with the contribution of investment plummeting to 13.6%, while that of consumption soaring to 65.4%. This is due to both the government’s strengthened work in the oversight&\\;nbsp\\;of key sectors at the time and the decline in both investment return ratio and investment expectations.As for consumption, despite its significant increase in contribution to growth, its growth has still slowed down compared to the pre-epidemic period. A comparison of the growth of total retail sales of consumer goods for the whole society from 2019 to 2021 shows that China’s total retail sales of consumer goods for the whole society reached 41,164.9 billion yuan in 2019, an increase of 8.0% over the previous year, then fell by 3.9% to 39,198.1 billion yuan in 2020 owing to the impact of the epidemic, and rose to 44,082.3 billion yuan in 2021, but only an increase of 7.1% over 2019. The two-year compound growth rate was 3.5%, much lower than the pre-epidemic growth rate. The impact of the epidemic on China’s economic industries has directly affected employment and growth in personal income, leading to a decline in consumption growth.To sum up, both consumption and investment are confronted by a certain degree of challenge in achieving this year’s steady growth target. As far as consumption is concerned, on one hand, we should tap into the structural consumption potential under the condition of the given income level and meet the targeted consumption needs of urban and rural residents, such as upgrading rural consumption and improving the social service sector as pointed out in the Report\\; on the other hand, increasing consumption essentially depends on raising the income level of residents, and therefore it is important to safeguard social employment and improve the quality of employment. Considering that the improvement of employment level and quality depends on the investment inclination and state of operation of enterprises, in this sense, consumption and investment are in fact one and the same in promoting the expansion of domestic demand. Considering the impact of the epidemic, the Report proposes a number of policies of taxation reduction and financial support to back the real economy and medium, small, and micro enterprises. Considering that the relevant policies are more related to the reduction of enterprise costs, and that it is the market expectations and earning performance of enterprises that determine their investment and business intentions, there is a need to provide enterprises with a more relaxed and stable market operating environment and broader market development space in the future, so as to improve their business expectations and stimulate their willingness to invest.Source: Institute of Economics, Shanghai Academy of Social SciencesBy Professor Zhan Yubo&\\;nbsp\\;