Nation shows the way
As the new year begins, the world expects China’s robust economy to drive growth
After a tumultuous year most people would prefer to forget, what now for 2021? As we begin the new year, the pandemic still looms large, with the number of cases still rising sharply in many Western countries.
China is the only major economy to have witnessed growth last year, but with vaccines being rolled out, many remain hopeful of some kind of global recovery.
This year is an important one for China, as it marks the 100th anniversary of the founding of the Communist Party of China. The country is also set to meet the target of achieving xiaokang — becoming a moderately prosperous society.
It is also the first year of the 14th Five-Year Plan (2021-25), which will be published in March, and is likely to set the course for China to join the high-income club of nations.
On the international scene, Joe Biden is set to become the 46th president of the United States later this month, with many observers optimistic about a resetting of Sino-US relations.
The environment will also be high on the agenda, with the United Nations Climate Change Conference, also known as COP26, due to be held in Glasgow, Scotland, in November.
Last month, key indications about China’s policy direction emerged during the Central Economic Work Conference, where there was commitment to support the nation’s economy as it continues its recovery from the pandemic. The conference also set a number of priorities, including boosting domestic demand, encouraging innovation and reinforcing supply chains.
George Magnus, research associate at Oxford University’s China Centre and a leading expert on the Chinese economy, said the conference was right to focus on demand-side reform.
He believes the Chinese economy could grow by 7 percent this year and move to a growth trajectory of 5 percent from 2022 onward.
“The rebound this year might be a bit bigger, but I have built into my forecast some tightening of monetary and fiscal policy at some point,” he said.
Stephen Roach, senior fellow at Yale University’s Jackson Institute for Global Affairs, predicts a “significant rebound” of 8.5 percent in China’s growth this year after estimated 2.5 percent expansion last year.
“This would average out at 5.5 percent over the two years, which is in line with what I believe is China’s underlying sustainable growth at this phase in its development cycle,” he said.
Koh King Kee, president of the Centre for New Inclusive Asia, a think tank based in the Malaysian capital Kuala Lumpur, said he thought China’s growth could reach 9 percent this year, a rate not seen for nearly a decade.
He believes growth will be boosted by the Regional Comprehensive Economic Partnership free trade agreement between Asian nations, which was signed in November, and a bilateral investment treaty being negotiated between China and the European Union.
“With the economy fully recovered from the pandemic, I am optimistic about China’s growth,” Koh said.
The Five-Year Plan will detail China’s priorities up to the middle of the decade.
In its annual World Economic League Table published on Dec 26, the Centre for Economics and Business Research, a consultancy based in London, predicted that China would become a high-income country by 2023, well within the period of the plan and exceeding a gross national income per capita of $12,536.
The report was bullish on China, predicting its economy would more than triple in size by 2035, the next major milestone year for the nation’s development.
Douglas McWilliams, deputy chairman and founder of the CEBR, believes the dual-circulation strategy, first outlined by President Xi Jinping in May, and which is likely to be central to the new plan, will be an important driver for China.
“The plan is to combine international trade with the strengthening of the domestic market. This seems an appropriate emphasis, since the relatively tense circumstances for international trade are uncertain,” he said.
On July 1, the CPC marks the 100th anniversary of its foundation.
Martin Jacques, the British academic and author, believes it is not just a hugely significant milestone for the Party, but also for China’s long history.
“The Party played the fundamental role in rescuing China from the century of humiliation (after its defeat in the First Opium War (1839-42)),” he said.
“More than that, it is in the process of transforming China into what will undoubtedly be the most important and influential country in the world.
Its achievement lies in the very best traditions of and a great landmark in the history of Chinese civilization.”
Kishore Mahbubani, distinguished fellow at the Asia Research Institute at the National University of Singapore and author of Has China Won?, said it was becoming impossible not to appreciate the progress the country has made.
“If anyone had dared to predict in 1921 that by 2021 China would become one of the two most powerful countries in the world — and had also just experienced the best four decades in 4,000 years of history — such a prediction would have been described as foolhardy and impossible,” he said.
“Clearly, the Chinese people have made enormous progress under the rule of the CPC. This major fact cannot be denied by anybody.”
Kerry Brown, director of the Lau China Institute at King’s College London and author of China’s World, said the extent to which the nation and the CPC are intertwined is not yet recognized outside of China.
“The Party is not well understood in the West. This (the 100th anniversary) is an important moment for many in the West to work out what they really think and understand about the history and role of the CPC,” he said.
“The CPC lies at the heart of the Chinese nation and its ambitions today. Trying to ignore that is rather like trying to write the history of modern Italy without mentioning Catholicism.”
One of the most significant events this year will be Biden moving into the White House to replace Donald Trump. The 78-year-old will become the country’s oldest president to be inaugurated.
Roach, author of Unbalanced: The Codependency of America and China, does not expect an immediate change in US-China relations.
“It won’t be easy to repair the damage done to the relationship over the past four years,” he said.
“The key will be to convert distrust back into trust — something that will require small steps at first. Coming together on climate change after the US rejoins the Paris Agreement and breaking the logjam on ( World Trade Organization) reform would be another.”
Mahbubani, a former UN diplomat, expects a change of tone and an end to the “nasty speeches” on China given by US Secretary of State Mike Pompeo and others, which many in China have viewed as Sinophobic and racist. He believes the US will sooner or later have to accept that China’s rise is now unstoppable.
“Any effort by the US to block the return of China, or the rest of Asia, is therefore bound to fail,” he said.
“The wisest thing the US could do today is to press the pause button on the geopolitical contest against China and work together with China to kill COVID-19. This is simple common sense, but sadly, common sense is not common in the US today.”
Edward Tse, CEO and founder of Gao Feng Advisory, a management consultancy, hopes the Biden administration will move away from banning Chinese technology companies such as telecommunications giant Huawei and chipmaker SMIC, and
also from cutting off the supply of key components, including semiconductors, to Chinese companies.
“Biden may not act straightaway, but I think he will have to eventually, because these sorts of restrictions are actually a lose-lose for both sides,” he said.
“US chip companies, in particular, are not benefiting from the ban, and worse, they are losing competitiveness because of a lack of access to the China market.”
Tse believes that Biden may come to realize that the only way to deal with China’s tech challenge is to make the US more competitive in areas such as cutting-edge telecommunications, where it currently has a weak presence.
“His strategy may therefore be to launch industrial policies to develop tech, as is taking place in China and East Asia generally,” he said.
Last month, the Organisation for Economic Cooperation and Development forecast that real GDP growth this year would be 4.2 percent, down from its September prediction of 5 percent. It also expects one-third of this growth to be generated by China, with Europe and North America lagging behind.
One unknown factor is the full extent of economic damage resulting from failed businesses and workers losing their jobs due to lockdowns imposed around the world.
Zhu Ning, professor of finance and deputy dean at the Shanghai Advanced Institute of Finance, said he has real concerns about the US and Europe, where the pandemic still appears to be out of control.
“It is difficult to make predictions, because it largely depends on how COVID-19 plays out. I am certainly worried about the prospects for recovery across the major Western economies, given the unprecedented shocks to consumption, employment and business confidence,” he said.
Roach, a former chairman of Morgan Stanley’s Asia operations and ex-chief economist of the investment bank, is also pessimistic.
He said there is little comfort to be drawn from economic history, with pandemics dating to the 14th century being followed by “long-shadow” anemic recoveries, and he fears a doubledip recession might occur in the US.
“The post-pandemic global economy is in need of more than just a vaccine. In most major developed economies, a second and more horrific wave of the coronavirus is at hand — not dissimilar to the course of the 1918-20 influenza outbreak,” he said.
Magnus, also a research associate at the School of Oriental and African Studies in London, is more confident and believes that China has shown the West that a V-shaped recovery is possible.
“The US and several other nations will also be driven by important tailwinds, such as easy money, loose fiscal policy, pent-up demand, high household savings rates, few balance sheet constraints and the spending of millennials,” he said.
Last year ended with the US Congress agreeing on a $900 billion stimulus package. This followed a $708 billion package in Japan and many others around the globe.
The world enters the new year with dramatically high debt levels, and big questions remain over how these can be brought down without the sort of austerity measures seen in many countries after the global financial crisis in 2008.
Zhu, at SAIF, believes a global reset may be needed to deal with the issue.
“There are many questions as to how the debt problem plays out in a zero or negative interest rate environment. Further international collaboration will be crucial for setting a post- COVID new global financial order,” he said.
Koh, at the Centre for New Inclusive Asia, believes the stimulus measures are not sustainable over any long-term period.
“Relief packages for the unemployed, or subsidies to the low-income group, do not create real wealth for a country. Budget deficits or the issuance of treasury bonds are not longterm solutions to the economic woes of a country,” he said.
One extraordinary feature last year was the strong performances of global stock markets during the pandemic.
The S&P 500 slumped to 2,191 in March due to initial fears about the virus, but by Dec 29 had rallied by 70 percent to 3,727. The Shanghai Composite Index, China’s main index, has been more restrained, rising from its March low of 2,646 to 3,379 on Dec 29.
Many commentators question whether stock indexes can continue to run uncorrelated to the real economies they are supposed to reflect.
McWilliams, at CEBR, believes there is a risk of a significant correction at some point, particularly if stimulus measures result in inflation.
“As inflation picks up, monetary policy will tighten. At that point, there is a risk of an asset price collapse. These things are difficult to fine-tune — it’s a bit like bursting a balloon gently,” he said.
Zhu believes that global equity markets this year may continue to run contrary to economic circumstances.
However, he said he expected a major correction at some point, as financial markets had enjoyed the huge stimulus packages and would become increasingly sensitive to small “butterfly effects” happening anywhere in the world.
Jacques, author of When China Rules the World: The End of the Western World and the Birth of a New Global Order, believes that 2021 could be the year in which the West realizes it is beginning to fall behind China.
“When the West finally wakes up to the implications of its failure to deal with the pandemic, it will slowly realize that, just as in the aftermath of the 2008 Western financial crisis, it has seriously lost out to China, which has handled the pandemic far better,” he said.
“The West has suffered a double whammy: It has failed miserably in response to the pandemic and, as a result, it will pay a much higher economic price.”