China Remains the Locomotive of Global Economic Growth

February 07, 2023

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When a year draws to a close, the prospects of Chinese and global social and economic progress in the coming year often spark wide media and scholarly discussions around the world. As the world’s second-largest economy, China adjusted its COVID policy in December 2022, and naturally garnered enormous interest from around the world regarding the economic outlook for the country and the rest of the world in 2023.

 

 

I. Certainty and uncertainty coexist in the environment of Chinese and global economy in 2023

Certainty refers to the expectation that the COVID-19 pandemic will ease. To gain insights into the Chinese and global economy in 2023, it is crucial to discern the pandemic’s trajectory first. After all, the pandemic has been the biggest factor influencing the economic landscape of China and other nations for the past three years. In early December 2022, the Chinese government made a big U-turn on its COVID policy and strategy. Therefore, it is logical to examine the Chinese and global economy from the post-pandemic perspective. As most countries have eased pandemic restrictions to some extent, it is unlikely that we will see another widespread shutdown of economic and social activities, although there remains a chance of major outbreaks in the coming year.

 

Uncertainty comes mainly from the conflict between Russia and Ukraine, which might probably become protracted for a long period of time. Meanwhile, the ongoing disruption of the global industrial chain by the U.S. and Europe is causing a continued chaos in the international economic order and volatility in the commodity market. These negative impacts on the world economy are likely to persist in the foreseeable future.

 

 

II. Certainty outweighs uncertainty in China’s economic growth

First, China is expected to have a strong economic rebound or recovery. After China ended its zero-COVID policy, the impact of the three-year-long pandemic on its economy would begin to wane and give way to a restorative growth or robust rebound, particularly in industries that were hardest hit, such as transportation, tourism, retail, logistics, and hospitality and catering. Recently, many local governments launched policies to boost consumption and support the resumption of work and production for private businesses, especially those micro, small and medium-sized enterprises. They were also encouraging businesses to organize all kinds of promotional events. With the coming of the new year and the peaking of the first wave of the Omicron infections, traffic congestion returned in many cities as the economy showed signs of resurgence. A family-hotel owner in Hainan Province reportedly said that a single month’s income now would make up for the losses of the last three years. This may sound quite optimistic, but it is possible, particularly in the first quarter, as travel surges during the holiday season of the Chinese Spring Festival, providing a boost to consumption after the peaks and falls of Omicron’s spread across the country. Even if the economy may not fully recover to pre-pandemic levels in the first quarter, moderate year-on-year growth can be reasonably expected. While the significant month-on-month growth may not be sustained after reaching a certain height, the recovery will not be disrupted or undergo dramatic fluctuations as long as there are no more nationwide infection spikes or repetition of the strict containment measures. Societal confidence in economic growth will be bolstered and economic stability will be fostered as long as economic activities continue to recover and grow at a steady pace.

 

Second, China’s private sector now has more robust policy support from the government. In the past two years, the COVID-19 pandemic persisted and the government tightened its supervision of the chaotic digital financial platforms. As a result, the private sector’s vitality waned and public confidence in the sector weakened. Some people declared their lack of confidence in the future of China’s private economy, and some even raised concerns that the reform and opening-up might reverse course. In response, the 20^th CPC National Congress reiterated that the Party and the government “must uphold and improve China's basic socialist economic system” and “must unswervingly consolidate and develop the public sector and unswervingly encourage, support and guide the development of the non-public sector.” The recent Central Economic Work Conference provided further clarity to this mandate, emphasizing the need for the government to include a series of unprecedented policy support in the bigger strategic picture. This includes optimizing the business environment, reducing taxes and fees, broadening financing channels, and providing increased financial support, while also lowering the threshold for private investments. The goal is to foster a favorable environment for private enterprises to innovate and generate wealth, instill confidence in the private sector, bolster expectations for its growth, and lay a strong foundation for the long-term sustainability of the private economy. There are also requirements for the governments like “law-based protection will be provided to the property rights of private enterprises and to the interests of entrepreneurs,” “government officials should help private businesses overcome their difficulties with concrete actions,” and “shape a cordial and clean government-business relationship.” Therefore, we are fully convinced that the private sector is irreplaceable in China’s national economic system, and it has a bright future. This viewpoint was also shared by 21 prominent private entrepreneurs who were invited to CCTV’s “Dialogue” program, including Zhang Yong, Board Chairman of Alibaba, and Xu Lei, CEO of JD.com Inc. They voiced their optimism for China’s economy and the private sector.

 

Third, “from Version 1.0 to 4.0,” China’s private economy will be even more diverse and dynamic. If the communication, air-conditioning, computer, and real-estate companies established in the early stage of reform and opening-up represent China’s private economy 1.0, then Internet giants like JD.com signify the 2.0. Likewise, new energy companies like BYD and CATL are considered the 3.0. The next phase, 4.0, will be propelled forward by the unprecedented favorable conditions created by emerging technologies such as artificial intelligence. We noticed that the industrial restructuring of the private sector appeared to be at a loss in the past two years, likely due to the overlapping effects of the COVID-19 pandemic, the US trade and tech war against China, and China’s own industrial restructuring efforts. In particular, the overcapacity of labor-intensive industries, such as textiles, garment, and shoe-making, which were heavily invested during the early stage of the reform and opening-up, coupled with real-estate bubbles, has made private investors confused, unsure of where to invest. At the same time, the ongoing trade tensions between the U.S. and China, especially in the field of science and technology, have ignited a widespread sentiment for technological autonomy and self-advancement, from central to local governments, from research institutions to industrial sectors, and from state-owned enterprises to private companies. In this context, new technological trends have begun to take shape. Recently, Huang Qifan, former mayor of Chongqing, predicted that the next two or three decades would see the emergence of five industries that each one of them is worth of trillion dollars: unmanned new energy vehicles, household robots, head-mounted AR and VR headsets and helmets, flexible displays, and 3D printers. As a leading manufacturing country, China is poised to gain a competitive edge amid this wave of high-tech industry development. The private sector in China is also expected to experience a surge in investment, giving rise to a new generation of tech-savvy and forward-thinking entrepreneurs. One of the most important contributors to China’s private economy is the increasing desire for technological innovation among private enterprises. Not only do private enterprises serve as the backbone of employment across China, but they are also the spearhead of the nation’s scientific and technological R&D. Of all Chinese companies, the private sector exhibits the greatest inclination to propel R&D and innovation. In fact, all of the 14 largest private enterprises in China allocate more than 8% of their revenue towards R&D endeavors. With a sense of optimism, we might envision a resurgence of private investment in 2023, which will help improve China’s industrial chain and add to its competitiveness, and allow the country to maintain proactive in reshaping the global industrial chain.

 

However, the Chinese economy is also grappling with the uncertainty that arises from two fronts. First, the torpid real-estate market. Despite the central and local governments’ efforts to revive the real-estate market with new policies, there is a question mark over whether these policies will work effectively, particularly given the already high per capita floor area. Second, the lack of confidence among consumers. Consumption decreased and savings increased due to the tumultuous economic environment of the past two years. It remains to be seen whether and to what extent this trend will reverse in 2023 and provide a boost to both consumption and economic development.

 

 

III. Uncertainty outweighs certainty in major developed countries 

First, as previously stated, the U.S. has succeeded in breaking the energy interdependence between Europe and Russia by inciting the Russia-Ukraine conflict, and forcing Europe to turn to the U.S. for oil and gas rather than Russia. This has not only hindered Europe’s green energy transition, but also led to a hike in costs for European industries. As a result, Europe has to contend with increased fiscal expenditures, shrinking industrial investment, capital outflows, and weakened currencies. The European economy has been teetering on the brink of recession for some time. Even if the war eases, the European economy is unlikely to recover in the short term. With a majority of citizens in the UK calling for another referendum on Brexit, and the ongoing wave of strikes in France, the prospects for Europe in the near future appear grim. 

 

The current state of the US economy is marked by a decline in inflation, a diminishing urgency in rate hikes, slowed economic growth, and a peak in the US dollar index. These factors suggest that the Federal Reserve (Fed) may have to consider lowering the interest rates again. However, the question remains whether, after returning to quantitative easing, the US stock and bond markets can regain their robustness. In light of the persistent trend of global de-dollarization, the durability of the strong US dollar remains uncertain. Furthermore, as the outlook weakens for dollar hegemony, it comes into question whether a new round of quantitative easing will continue to manipulate and take advantage of global investors. After all, there are very few reasons to support the possibility of prosperous stock, bond, and foreign exchange markets of the U.S. The conundrum between the US economic structure, the logic of market, and the objectives of the Fed remains a challenging issue to address.

 

On the other hand, it should also be noted that the U.S. and Europe lifted COVID-19 restrictions long ago, and the social and economic order has since been restored. Meanwhile, the possibility of a negotiated solution to the Russia-Ukraine war cannot be ruled out, which would boost confidence in the European economy. Furthermore, the end of the US interest rate hike cycle and the depreciation of the US dollar may aid in the years-long efforts of rebuilding the real economy, thereby averting a severe recession that could destabilize the global economy.

 

 

In conclusion, China, as the world’s second-largest economy, portends a promising outlook for 2023. This augurs well for the global economic prospects and serves to mitigate the negative impacts of some uncertainties. Should the U.S. and Europe successfully avoid a recession and extricate themselves from the current predicament, we can anticipate a modest upward trajectory for the world economy in the coming year.

 

 

 

 

 

Please note: The above contents only represent the views of the author, and do not necessarily represent the views or positions of Taihe Institute.

 

This article is from the December issue of TI Observer (TIO), which is a monthly publication devoted to bringing China and the rest of the world closer together by facilitating mutual understanding and promoting exchanges of views. If you are interested in knowing more about the October issue, please click here:

http://www.taiheinstitute.org/Content/2023/01-31/1406041512.html

 

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