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The Nikkei View

China's economy is not out of the woods yet

Positive growth belies unresolved structural challenges

A view of Beijing on Jan.15: China's economy has not escaped the impact of the coronavirus.      © Reuters

China's real economic growth rate in 2020 was 2.3%. That is the lowest since 1976 -- 44 years ago -- when the country was in the throes of the Cultural Revolution. Although growth in the October-December period of 2020 registered a healthy 6.5%, the new coronavirus remains a potential threat both within China and abroad.

In the second half of last year, China's economy was driven by investment, mainly by state-owned enterprises, and growing exports of medical and hygiene products and personal computers. Demand for these products has expanded as the pandemic spreads and more people work from home. This helped China achieve positive growth in 2020, making it the only major economy to do so.

However, total retail sales of consumer goods -- the combined sales of department stores, supermarkets and e-commerce platforms -- fell by 3.9% for the full year. New car sales also fell by 1.9%, the third consecutive year-on-year decline.

Positive signs in the Chinese economy have garnered much attention lately, but many issues still linger that require attention. The country's relations with the U.S. are unlikely to improve in the near term, even after the Biden administration takes office. Sanctions, tariffs and investment restrictions from the Trump era will continue to constrain the activities of Chinese companies.

The country has not fully brushed off concerns about the pandemic either. Citizens have been asked to stay home in Hebei Province, near Beijing, and elsewhere. Restrictions on movement are expected to be issued during the Lunar New Year in February, which may dampen consumption.

Furthermore, Chinese authorities have started tightening anti-monopoly measures against information technology companies, including online retailers. This may affect the performance of China's massive internet companies, the driving force behind the country's growth. The impact on the broader economy needs to be carefully watched.

This year marks the 100th anniversary of the founding of the Communist Party of China, and the first year of the country's new five-year plan. President Xi Jinping and other top officials want to lead the global economy by achieving a V-shaped recovery, and authorities are predicting growth of around 8% for 2021.

Such a high figure is likely achievable for the time being, as the economy is seen rebounding strongly from the previous year's low level. But ensuring stable and sustainable long-term growth is not easy.

The key will be for China to bring about sweeping deregulation measures to boost the potential of the private sector. Opening the doors wider to foreign investment will likewise be an important agenda. Positive growth belies unresolved structural challenges for China's economic future.

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