Healthy growth forecast despite headwinds
The outlook for China’s external conditions has worsened more than we expected a year ago, which has led us (at Oxford Economics) to revise down our long-term growth forecast. But we don’t expect dramatic decoupling by developed countries, and continue to forecast significant growth in coming decades.
As we expected, China keeps reforming and opening up its economy. But external conditions have worsened more than we thought partly due to the COVID-19 pandemic.
The US administration is trying to decouple from China and counter it, and no matter who wins the presidential election, it may not necessarily imply a much softer US stance against China. Other countries have also taken some steps to decouple from China.
US firms not keen on disengaging with China
However, in our view, dramatic decoupling remains unlikely, because governments of most developed countries want to stay engaged with China. Also, even as US-China tensions have worsened drastically, many US multinationals remain keen to engage with China and are increasing their presence in the country.
In all, while we have revised down our long-term growth forecast, it remains relatively strong, with growth averaging 4.5 percent in 2020-30, allowing China to overtake the US in 2030. That said, our forecast suggests per capita GDP would still be less than onethird of the US level by 2040 in market exchange rates.
If the US were to decouple significantly from China, but other developed countries do so only somewhat, China’s trend growth would be 0.4 percentage points per year lower through 2040, meaning an 8 percent smaller economy by then. If other developed countries join the US, the impact would be much larger.
In a more optimistic scenario, globalization continues, allowing China and developed countries to benefit more from international trade, specialization, and cross-fertilization of technology and know-how.
As we expected a year ago, China remains on the path of economic reform and opening-up. The Chinese government is making progress with reforming the hukou (household registration) system, thus encouraging urbanization, and improving the business climate and monetary framework, although Stateowned enterprise reform has been less impressive.
Notwithstanding the Sino-US tensions and the COVID-19 shock, China has accelerated the opening-up of its economy. A new foreign investment law, with a much shorter “negative list”, should improve the playing field for foreign investors. Foreign ownership caps on financial institutions and quota restrictions on inward portfolio investment are being removed, and stock and bond “connect” schemes with Hong Kong are expanding. In response, foreign financial inflows have increased.
The 14 th Five-Year Plan (2021-25) will likely have the “dual circulation” development pattern as a key theme. A response to the external headwinds, “dual circulation” is about boosting domestic demand and domestic growth, and ensuring the economy is robust against shocks, while at the same time continuing to open up further to the outside world.
US decoupling efforts still a big concern
We expect further progress on opening up to foreign investment and some more unilateral reduction of import tariffs. But the US administration has ramped up its efforts to decouple the US economy from China’s and to counter the country in the technological sphere, and therefore imposed restrictions on US exports of high-tech products, on Chinese students and researchers in the US, on Chinese investment in the US, and on US investment in China. It has also taken actions against Huawei, Tencent and ByteDance and other Chinese high-tech companies in various ways.
Other developed countries, including the United Kingdom and Australia, have officially restricted Huawei from participating in their 5G networks.
While no “common front” toward China has been formed, such a scenario cannot be ruled out in the coming years, given shared concerns.
Restrictions on transfer of US high-technology
Other countries’ disputes with China have led their governments to take steps to decouple their economies with that of China. As the Chinese-Indian border dispute heated up this year, India banned access to more than 224 Chinese apps, and is considering additional trade and investment restrictions on Chinese enterprises.
In all, the more significant decoupling we saw as the biggest risk for China’s long-term outlook last year includes more decoupling by developed countries away from China in the coming decade than did last year’s baseline. That limits the transfer of technology and know-how via trade and investment more significantly than we had assumed last year.
But dramatic decoupling away from China remains unlikely, and recent developments support this view. The governments of most developed countries want to remain engaged with China. During a virtual summit with President Xi Jinping on Sept 14, European Union leaders asked China to take concrete steps before a long-awaited investment treaty can be concluded.
But they confirmed that progress had been made on state subsidies and Stateowned enterprises, and they remained interested in completing the treaty. Plus, China’s announcement on carbon neutrality by 2060 has increased the room for engagement.
Also, despite worsening US-China tensions, US foreign direct investment in China rose 6 percent in US dollar terms in the first half of 2020, banking on the growth of China’s consumer demand and responding to Beijing’s measures to further open up the economy, including its financial sector.
A member survey conducted between mid-June and mid-July by the US Chamber of Commerce Shanghai showed that 71 percent have no plans to change their production arrangements, up 5 percentage points from last year.
Some 14 percent plan to move some production to other countries, and 4.3 percent plan to move part of their operations back to the US. Despite likely escalating US-China tensions, we think China is unlikely to retaliate against US companies in China.
China to remain among fastest-growing economies
In our long-term base scenario, China would remain among the fastest-growing economies, overtaking the US in size in 2030 and exceeding it by onefourth by 2040, in market exchange rates. This assumes an average 0.9 percent per year real (GDP deflator-based) exchange rate appreciation against the US, compared with 2.5 percent per year in 2000-18.
Although this would still leave Chinese people much less rich than Americans, China’s GDP per capita would rise to 32 percent of the US level by 2040 in market exchange rate or to 50 percent in purchasing power parity terms.