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Nation in position to address challenges of new year

Thursday,Jan 02, 2020

This year is destined to be a major one for China, as the country is set to become a moderately well-off society and to have eliminated all forms of extreme poverty in time for next year's 100th anniversary of the Communist Party of China.

Many observers expect another challenging year for the economy, which has been affected over the past 12 months by both trade friction with the United States and slowing global growth.

With the US recording the longest period of expansion in its history in July, the inevitable consensus among economists on the global economy is that a recession cannot be far away, even if it doesn't occur this year.

Relations between Beijing and Washington will again be in focus as political fervor heats up for the US presidential election in November.

The United Kingdom is set to leave the European Union, making Brexit a reality, but there is still a risk that no free trade agreement will be reached.

The year ahead also promises to be another important one for the Belt and Road Initiative, with a number of important projects underway across many continents.

As far as the Chinese economy is concerned, the three-day Central Economic Work Conference, which was attended by the country's leaders last month, emphasized stability.

As a result, commentators believe that the central leadership will set a target of around 6 percent for GDP growth in the Government Work Report in March, compared with the range of 6 to 6.5 percent set last year.

Forecasts: Sino-US ties in focus

After the government revised growth for 2018 in November, a 6 percent expansion this year would be sufficient to achieve a doubling of 2010's GDP, which would equate to China becoming a moderately well-off society.

Imogen Page-Jarrett, China research analyst at The Economist Intelligence Unit, an economics research organization, is forecasting GDP to grow by 5.9 percent.

"The expected growth rate will still be enough for the government to meet its centennial goal. We expect it to introduce more aggressive stimuli in 2020 to ensure economic growth reaches this level, including continued monetary loosening and government spending on infrastructure, as well as moderate loosening of policy in the property sector in certain regions," she said.

Louis Kuijs, head of Asia Economics at the consultancy Oxford Economics, also believes that setting a lower target would be the right course of action

"It would make sense, as it would imply a further softening of the target compared with 2019, without leading to too strong a deceleration," he said.

Jing Ulrich, vice-chairman of global banking and Asia Pacific at investment bank JP Morgan Chase & Co, said Chinese leaders were right to emphasize at the conference the importance of transitioning from high-speed to high-quality growth.

"Chinese policymakers have been responsive in managing the nation's financial and economic risks. With the economy facing headwinds, they have reiterated the continuation of supply-side structural reforms in the pursuit of high-quality growth," she said.

If China does succeed in eliminating extreme poverty this year, it would be a remarkable achievement and one that even some developed economies have failed to match.

It would be the culmination of a 40-year journey that has seen 800 million moved out of poverty, the highest number ever in such a short period of time.

Stephen Roach, senior fellow at the Jackson Institute for Global Affairs at Yale University, pointed out that 4.8 million citizens in the US still live in absolute poverty — below the $3.20 a day purchasing power parity threshold. Some 2 million of them do not have running water.

"The elimination of poverty is an important achievement on the road to prosperity for any nation, developing or developed. With many of the world's wealthiest nations still afflicted with significant pockets of poverty, China's progress is all the more impressive," he said.

"China's unparalleled progress on poverty alleviation may well be the singular achievement of its growth and development miracle."

Douglas McWilliams, who carried out extensive research on poverty for his recent book, The Inequality Paradox: How Capitalism Can Work for Everyone, argues that China has been particularly successful in not leaving people behind as it become wealthier.

"It has made creating prosperity translate into reduced poverty, and there are lessons other countries could learn from," he said.

Most commentators expect the global economy to remain sluggish this year.

However, Page-Jarrett, from the EIU, believes global growth will pick up slightly, from 2.3 per cent last year to 2.4 percent.

"With continued uncertainty in the global operating environment, we expect that business confidence and investment will remain subdued," she said.

"The world's major central banks will continue to pursue ultra-loose monetary policy. This will cushion demand in developed markets and limit the financial pressures that some heavily indebted emerging-market economies might otherwise face."

Kuijs, at Oxford Economics, doubts that this year will herald the start of a global recession.

"We are not very bullish on the global economic outlook for 2020, but we think that the risk of a recession or something close to that remains modest, given the insurance policy provided by monetary and fiscal stimulus pursued across the world," he said.

Last month, the US and China agreed phase one of a trade deal, but many observers expect anti-China rhetoric to increase in the upcoming presidential election.

Shi Yinhong, director of the American Studies Institute at Renmin University and one of China's leading foreign policy experts, believes there will be considerable "China-bashing" from both the Republicans and Democrats on the campaign trail.

"This is not new, but it will be more to the fore because of the trade dispute. As to the outcome, I think Trump has quite a remarkable probability of being re-elected," he said.

"If he isn't, and the Democrats win, I am not certain what the impact on China will be. A Democrat president might be a little more predictable and there might be a little more certainty."

Wang Huiyao, founder and president of the Center for China and Globalization(CCG), a leading independent think tank based in Beijing, believes the phase-one trade agreement has provided much needed stability.

"The trade dispute, for now, has probably stabilized and the challenge is to maintain China-US relations and not let them deteriorate," he said.

Roach, at Yale, agrees the agreement has eased tensions for the time being, but he thinks they will resurface this year.

"It takes a worrisome source of uncertainty out of the near-term global growth equation. But as the events of the past 21 months have indicated, there is far more to this conflict than tariffs. Tensions over innovation policy, technology leadership, cybersecurity and state-sponsored industrial policy underscore both the breadth and the depth of the protracted tensions between the world's two largest economies," he said.

However, Shi, at Renmin University, believes that the US and China will continue to "decouple" and the world will become more protectionist, rejecting globalization.

"The forces of protectionism are becoming stronger. Countries across the world are looking inwards. ... This is a trend that is not going to end any time soon," he said.

As with last year, another source of uncertainty this year could be Brexit. The UK will leave the EU by the end of this month, but will then enter an implementation period.

Prime Minister Boris Johnson has enshrined in law that this period will end on Dec 31, regardless of whether the UK agrees a free trade agreement with the EU, creating the prospect of further business uncertainty throughout the year.

Page-Jarrett, at the EIU, believes the UK will not be able to meet its self-imposed deadline.

"Given the complexity of negotiating the final-status arrangement, we expect that the UK will be forced to seek a further extension, concluding a free-trade agreement by December 2022 instead," she said.

"This will lead to instability in the currency. The pound will remain volatile in the coming months, and again toward the end of next year."

While the UK is disentangling itself from the EU, the Belt and Road Initiative, now in its eighth year, will continue to forge new links between countries.

McWilliams, also founder and executive deputy chairman of the Centre for Economics and Business Research, an economics consultancy based in London, said the initiative will provide one of the most significant global boosts this year.

According to a report by his consultancy, it will add $7.1 trillion annually to global GDP over the next two decades, involving a significant surge in infrastructure spending. This will add some 4.2 percent to global GDP by 2040.

"The BRI is a huge boost to the world economy. While its peripheral elements are important, the biggest one is the development of land-based trading routes from Asia to Europe, which will transform China's trading links with Europe," he said.

"It now costs just $2,600 to send 1 metric ton of freight from Chengdu (capital of Sichuan province) to Łódź in Poland in 14 days by rail, a fraction of what it would cost by author modes of transportation. This is transformative. It is also making the Chinese and Russian economies heavily integrated, which will enhance their links."

Bukola Ogunsina, editor of the Sunday edition of the Leadership newspaper in Nigeria, said the Belt and Road Initiative is particularly important in Africa, where it is fostering a deeper relationship between China and the continent.

"Chinese companies are building bridges, roads and hydroelectric plants in Nigeria and I think people are beginning to grasp the whole concept of what the initiative means," she said.

"What China is offering is a mutual relationship based on respect. It is not a one-sided thing at all."

Ulrich, at JP Morgan Chase, also thinks there is a growing global realization of the scale of the initiative.

"It presents substantial opportunities for the nations involved, ideally boosting regional economic co-operation, promoting growth and fostering trade and investment," she said.

Not only this year, but the new decade as a whole, is likely to be an important time for technology, with major breakthroughs expected in artificial intelligence, robotics and telecommunications, and with Chinese tech giant Huawei already a leader in 5G.

China has set itself the target of being a global leader in technology by 2035.

Jeffrey Towson, professor of investment at Peking University Guanghua School of Management, feels that China is already ahead in a number of areas.

"China's digital giants are now the leaders in e-commerce, messaging and payments. Alibaba is better than Amazon. WeChat is better than Facebook. I expect them to extend this lead in 2020," he said.

Towson, author of the best-selling The 1 Hour China Book with Jonathan Woetzel, said China has had particular success with consumer products.

"Silicon Valley is dreadfully boring on the consumer side — almost stagnant. China and Asia (as a whole) is where the excitement and innovation is for most everything on a smartphone. China's tech giants will continue to evolve into global leaders — Huawei in telecommunications and smartphones, Tiktok (known as Douyin in China) in entertainment, and Ant Financial in payments," he said.

Roach, author of Unbalanced: The Codependency of America and China, said it is important to be realistic about the prospects for this year.

"The good news is that key sources of idiosyncratic risk appear to have been addressed for the time being — namely, the tariff war between the US and China as well as the political uncertainty surrounding Brexit, " he said.

"The bad news, however, is the downward growth momentum in Europe — especially in Germany — and in Japan. You also have the sluggish state of global trade continuing to take a toll on the export-led economies of East Asia and also Mexico."

McWilliams, at CEBR, said any predictions about this year have to be tempered with the knowledge that a global recession is looming.

"This year looks likely to be a better one than 2019, but there are a lot of imbalances in the global economy that have not been resolved and there is likely to be quite a severe recession within the next five years," he said.

From China Daily,2020-01-02
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