Characteristics of World Economic Recession and Momentum of China’s Growth
By Chen Wenling
In the first half of this year, the international situation has been extraordinarily severe, full of challenges that are beyond people’s expectation; the world has changed in a dramatic way that no one has anticipated. In the same astonishing way, China combats COVID-19, reopens the economy, and stabilizes the market, making fast headway towards economic recovery. The World Bank, the International Monetary Fund (IMF) and the Organization for Economic Cooperation and Development (OECD) all revised up their forecasts for China’s economy this year, from 1.9% to 1.2% and then 1%. Under the leadership of the Communist Party of China and thanks to the arduous efforts of the Chinese people, the business community and the government, China has moved out of the negative territory and achieved a positive growth of 3.2% in the second quarter, which is indeed a hard-won achievement.This lays the foundation and creates conditions for the economy to grow in a way that the above mentioned three organizations have not anticipated.
I.Characteristics of the world economic recession
The international situation in the first half of the year is characterized byan uncontrolled pandemic, economic downturn, policy failure, dysfunction of democracy, and governance disorder. To analyze the international situation in the first half of the year from the above five perspectives is not only to demonstrate the greatness of China, but to show that the world is stuck in a grim situation. China’s efforts should be fully recognized and its contributions respected. Some countries should do away with biases towards China and opt for global cooperation, so as to save the world economyand get it out of the grave dangers posed by the pandemic. This is what China is doing right now. We are not trying to highlight China’s superiority to others, but to show that what China can achieve through hard work is also possible for other countries by learning from China’s practices, and lessons as well.
i.An uncontrolled pandemic
There have been over 40 million confirmed COVID-19 cases worldwide, and more than 1 million people have died of the virus. The pandemic is running out of control in three ways.
First, the epidemic is out of control in the US, with the most infections in the world.101 days after the first case in the country, President Trump finally chose to wear a mask. Not wearing a mask is widely seen as politically correct in the US and some other Western countries. Politicians and some among the general public regardmask wearing as an act of human rights violation.In my opinion, the prejudices somepeople in theWest have shownduring the pandemicreveals how distorted are the values they have thought to be beyond reproach. There have been more than 8 million confirmed cases and over200,000 deaths in the US. It is unimaginable that some people are still anti-intellectual when so many lives have been woefully lost.
According to Washington Post reports, American politicians, while failing to contain COVID-19 because of their incompetence and prejudice, keep scapegoating China, the WHO, Europe, Democrats, and even Dr. Fauci, an authoritative experton infectious diseases who has devoted a lot of efforts in the US response to COVID-19. Some American politicians gloated over a recent fare-up of infections in Beijing, expecting a second wave in China. Beijing, however, brought it under control in less than a month. China reported good economic numbers for the second quarter, something these politicians feel all a touch uneasy. I personally call on them to be fair minded. They have made the wrong way into the current mess and should reflect on how COVID-19 has gone out of control in the US, the most powerful country that boasts the best medical facilities and scientific knowhow.
Second, some developing countries have lost control of the epidemic, which has been spreading and evolving at a staggering pace. Brazil, for example, now counts the third largest number of cases from a very low ranking when the virus first broke out. The situation is very serious, with more than 5 million confirmed cases and over150,000 deaths. The Brazilian President, also known as “Trump in Brazil”,was infected largely because of how he approaches the pandemic. The Trump approach, wherever applied, is doomed to fail. Another example is India.India, once fairly successful in managing the epidemic, now ranks in the second place, with over 7 million cases and nearly 100,000 deaths. These emerging economies and developing countries face a grim situation and some have lost control of the pandemic.
Third, the virus is spreading fast in African and Latin American countries. Infections are now found in over 200 countries.Except for China, where infections are preventable, controllable, traceable and treatable, and some countries where the virus is basically under control, other countries are confronted withdaunting challenges.
ii. Economic downturn
As the epidemic gets out of control, the economy tumbles.Each country must work out a delicate balance between people’s safety, epidemic response, and economic reopening.Therefore, the whole world is under extreme pressure. The economic downturnwill send the world economy into the most severe recession since World War II.The IMF, World Bank, OECD, US, Federal Reserve, and European Commission, among others, have all made predictions. They have reached thesame conclusion, though varying from one to another in the numbers they provided. Some say it is the worst since the Great Depression of 1929-1930, while others say it is the worst since 2008. Judging from the actual situation, it is at least the worst one since World War II.
The current recession has five characteristics:
First, the world economy enters a recession simultaneously. Advanced economies, emerging economies, developing countries and poor countries have, without exception, contracted.The World Bank predicted that 93% of the world’s economies will fall into great recession.In 2020, the economic activity of advanced economies will shrink by 7%, while that of emerging economies will contract by 2.5%.
Second, the recession is extremely deep.China’s economy grew by -6.8% in the first quarter, the only negative growth since the reform and opening-up. In 2019, China’s GDP increased by 6.1% for the whole year andby 6.4% in the first quarter.From 6.1% to -6.8% in the first quarter of 2020, it means a steep fall of almost 13%.China moved out of the negative territory in the second quarter, registering a growth of 3.2% thanks to revived investment. The OECD forecasts a global decline of 6% to 7.6% this year, the World Bank anticipatesa contraction of 5.2%, and the IMF predicts a fall of 4.9%. According to the OECD, the Japanese economy will shrink by 6%, and, in the worst case, by 7.3%. The EU and the eurozone will contract by 9.1%. The US will shrink by 7.3%, and, in the worst scenario, by 8.5%. As the world is grappling with a second wave of infections, the euro zone will contract by 11.5%, in which France will shrink by 11.4% and Britain by 11.5%. Only two months after its last prediction in April, the IMF in Junepointed to a deeper recession. In April, it was predicted that the global economic growth would be -3%, and -6% or more if the epidemic could not be controlled. In June, it forecast that the global growthwould be -4.9% at least. The pandemic will incur a loss of as high as US$12 trillion, farmore than what the world lost in 2008 as a result of the subprime mortgage crisis.
Third, the recession lasts longer.It is also a feature of the ongoing recession.Generally speaking, if the economic growth rate is less than 3% for two consecutive quarters, it should be regarded as economic recession.Since the second quarter of this year, the world economy has been in a state of recession, which will, without any doubt, last for more than two quarters oreven four quarters. As the virus still rages in the US, Brazil, India and other countries, the global pandemic will certainly not be controlled by the end of this year. If so, the world economy will suffer a longer recession.As Kissinger said from a political point of view, the epidemic will affect several generations to come.From an economic point of view, the World Bank, IMF and OECD have all predicted a severe recession this year, although they forecast a return to positive growth in 2021.However, it remains to be seen whether positive growth can be achieved.Even if there is a positive growth, it will be lower than what is predicted by these institutions, as the impact of the pandemic is so deep that it is difficult to reverse the trend in the short term.
Fourth, the recession is widespread. As predicted by the World Bank, the global per capita income will drop by 3.6%. For those inpoverty-strickencountries, the fall will be much steeper. In 190 countries, the per capita income will decline, and hundreds of millions of people will be stuck in extreme poverty. The income decline was not so widespread in 2008, 1929 or 1930. Massive bankruptcies and job losses will occur, making life difficult for many.
Fifth, great uncertainties lie ahead for the recovery and growth of the world economy. First, theevolving and deteriorating pandemic. Second, American unilateralism, protectionism and populism.Third, the US election and Brexit. Fourth, competition among big powers and local wars. Fifth, natural and man-caused disasters in some countries, including locusts, floods and droughts.The economic downturn will not be arrested by a single country. Even if China brings COVID-19 under control and registers the steadiest growth, it will not be able to push for the growth of the whole global economy on its own.
Policy failure is also a prominent problem. There is not much room for global monetary policy. The US continues to ease its monetary stance, and the liabilities of the government have risen from US$4.5 trillion last year to the current US$ 7.3 trillion, an increase of nearly US$ 3 trillion. Its first relief package wasUS$2.2 trillion.And now an additionalUS$2.5 trillion is in the pipeline. The US interest rate was already cut to zero in March.Following the suit, in the footsteps of America, over 40 countrieshave accelerated money printing, and more than 30 countries have implemented negative interest rates in real terms.When the US pursued unlimited monetary easing in March, 35 countries jumped on board.Manycountries have failed in their monetary policies, with negative interest rates and negative bond yields. As so many banknotes have been printed, the economy would implode if the monetary policy is further eased. Some people in China also call for monetizingthe fiscal policy, which I think will be very dangerous.Monetary policy space has been severely squeezed. If the UScontinues to ease without restraint, it will be a nightmare for the world economy.These cheap banknotes will spell disastersand cause heavy losses wherever they flow.After the cheap money rushed in, it acquires high-quality assets and disrupts the market order.I believe that monetary and fiscal policies are necessary to salvage the economy. For example, a global relief fund of US$ 5 trillion was proposed at the G20 Extraordinary Summit to fight against COVID-19.But the problem now is while a massive amount of money is printed,a portion is used to bail out the economy,whereas a large part goes into various markets, including stock markets and housing markets.
The space for fiscal policy has also been severely squeezed.At present, most countries adopt fiscal policies to rescue the economy. Some economists have made an analysis of employed fiscal policies, which are worth RMB 56 trillion, or more than US$ 8 trillion.Personally, I think that RMB 56 trillion may still be a conservative figure. Some countries have already spent 40% of their GDP on economic bailouts, and India has spent 20% of its GDP.Therefore, many countries’ macroeconomic policies, including monetary policy and fiscal policy, have failed.Massive job losses and bankruptcies have become global issues, which won’t be resolved or mitigated if the economy does not recover.
iv.Dysfunction of democracy
Dysfunction of democracy has become a global issue.Although it appears not related to the economy, it has direct bearing on the economic recovery and development.For example, the Western way of dealing with the epidemic, and philosophy on governanceis actually attributable to the rapid spread and sharp deterioration of the epidemic.Some Americans even said that it is a God-given right to breathe and that God breathed into me and gave me the right to breathe. You cannot deprive me of the right given by God. Along this line of thinking, herd immunity and not wearing masks are seen as politically correct, and the virus is politicized. The Western public subscribe to such cultures and values, which leads to widespread anti-intellectualism. This is why it is difficult to control the epidemic in some countries. Some restaurants and hotels in the US put out signs on their doors saying that quarantine, social distancing and mask wearing are not required for customers and that people can hug and are welcome to stay. This echoes President Trump’s practice.When COVID-19 still rages in the US, the president continues to hold election rallies, and huge, excited crowds are gathered without wearing masks.This is what the West calls democracy.In the face of COVID-19 outbreak, dysfunctional democracy has caused catastrophes.It is not surprising that tens of thousands ofnew cases are added in the US every day. This is really a kind of dysfunction of democracy.
The dysfunction of democracy has aggravated the epidemic not only in the US, but also in some other countries. It appears to be a result of differences between systems that have little to do with the economy. However, differences betweenideologies and systems have a direct impact on the control of the epidemic, which in turn affects economic growth.
v. Governance disorder
Governance failure, or governance disorder, is a serious problem. A Trump Death Clock was set up in New York, which is 56 feet high, to record the deaths that could have been otherwise avoided. In New York, there used to be a National Debt Clock, which was designed to monitor US debt issuance. As the US dollar is linked to gold and other countries link their currencies to the dollar, the credit of the dollar is the anchor of the stability of the whole world. So it is necessary to control US Treasury bonds. The maximum of this clock is US$10 trillion, but it expired in 2008. During a long period before 2008, the US increased the printing of money by less than US$10 trillion. After four consecutive rounds of monetary easing in the aftermath of the 2008 international financial crisis, the US debt topped US$10 trillion, and now has exceeded US$25 trillion. By the end of this year, it is estimated that the US government debt will exceed US$9 trillion, and the national debt will exceed US$27 trillion.
As the world’s largest economy, the US has failed in its epidemic response and domestic economic governance. It does not play a leading role in international governance either. The US has exited from 13 international organizations. At a time when the world needs to cooperate to fight COVID-19, the US went its way to withdraw from the World Health Organization (WHO), which will take effect on July 6th next year. Now the US election is going on, Democratic candidate Joe Biden stated that if he is elected, he will resume the status of the US in the WHO as soon as possible. The US not only exited from the WHO, but also forced the WTO into an impasse. It also withdrew from the Iran Nuclear Treaty, the Intermediate-Range Nuclear Forces Treaty, and the Open Skies Treaty, which have served to constrain military operations. What the US has done poses grave challenges to global security governance.
The uncontrolled pandemic, economic downturn, policy failure, dysfunction of democracy, and governance disorder will prevent the world economy from turning the corner. China has made a turn for the better, and accomplished what the US and international organizations had not expected. Even we the Chinese didn’t imagine that we could have come this far. There is something important that the world could reflect on. Western countries, especially those hit hard by the pandemic and those that suppress and contain China, should realize that there is no way to contain China. China has a huge market, a full-fledged manufacturing industry, the leadership of the Communist Party of China, and institutional advantages. China is well-placed to pursue the internal circulation of its economy, and can achieve win-win results with others.
Therefore, China is not to be contained. Any attempt to do so will only force China to accelerate its development and strengthen the weak links to build a more innovative and competitive industrial and economic structure that helps China to emerge as a winner in the next round of international competition.
II.The Chinese economy is a stabilizer for global recovery and growth
As of last year, the volume of trade in goods in countries and regions along the Belt and Road had reached US$ 6 trillion. China’s trade with BRI partner countries accounts for about 30% of its total. In the first half of this year, China’s trade with ASEAN reached RMB 2.07 trillion. ASEAN has surpassed the EU as China’s largest trading partner, while the US has dropped to the third place.
China is making plans for new infrastructure, innovative projects, talent cultivation, and opening-up for deeper reform. China has set out clear strategic goals and is taking the right steps forward. What is particularly important is that the Chinese people have shown unprecedented patriotic sentiments. According to a recent report by Harvard University, which sampled and interviewed tens of thousands of Chinese people for 13 consecutive years, 93.1% of the Chinese people are satisfied with the Chinese government, a percentage that is higher than in any other country.
No one can stand in the way of China’s advance. Some American politicians must stop their wrongdoing. The US, which has been hard hit by the pandemic, needs all the more to cooperate with China. China is a country with a broad mind.China will cooperate sincerely with the US to help it control the epidemic, in an effort to put the world economy on track to recovery, as long as the US side can look to the future and cooperate with China sincerely. If the two economic powers can recover and grow at the same time,the whole world will be better off.
In the first half of 2020, China’s import and export were better than expected, and registered positive growth in June. In the midst of great uncertainties caused by the pandemic, China’s growth is a source of hope for the recovery of the world economy.
First, the momentum of China’s growth can be maintained. Moreover, while prevailing over the pandemic, we can also strive for long-term, stable growth. The momentum is here to stay because China remains the largest country in trade in goods, an advantage China has kept since 2013. This has not changed after the outbreak of the epidemic, and China still retains the international market shares. China has the manufacturing capacity and complete industrial chains in many sectors at home. In fact, international trade is just a means of trading. What really matters is the manufacturing capacity, how many goods a country can produce and export, and how strong the manufacturing capacity is. China surpassed the US in 2010 to lead the world in manufacturing capacity, accounting for30% of the global output in 2019. China had established the most complete manufacturing systems, covering 39 major categories, 191 middle categories and 525 small categories. The amount of goods that can be traded represents the manufacturing capacity, which is the basis for China to maintain the momentum of development.
Second, China is becoming a global trade center. China has been a big exporter. Since recent years, it is growing to be a big importer. With about 5,000 wholesale markets for procurement trade like the Yiwu small commodity market, China is on track to be an international trade center in afew years. Transshipment included, China is likely to become the most active international trade center with the fastest circulation.
Third, China is pursuing closer economic cooperation with its neighboring countries. The RCEP is coming close to an agreement. Progress and implementation is accelerating. The process of the China-Japan-ROK Free Trade Area is also speeding up. China’s neighboring countries have done a better job than Europe, Africa, North America and South America in controlling the epidemic. These countries are the best choice for China to foster a dual-cycle development architecture with the domestic cycle as the mainstay and with domestic and international development reinforcing each other. It is with these countries that China is most likely to form a closer industrial chain.
Digital trade, the next-generation trade, is developing rapidly in China. Digital trade through cross-border e-commerce grew by more than 40% from January to June this year, much faster than offline trade. Up to now, there have been 105 cross-border e-commerce pilot programs in China. Cross-border e-commerce is the predecessor or the foundation of digital trade. China is the first mover in digital trade. China’s investment and trade with countries along the Belt and Road has grown the fastest.
For the above reasons, and given the fact that China is already the largest trading partner of more than 120 countries, China’s trade and investment will continue to grow steadily. Due to the impact of the pandemic, China’s GDP dropped by 6.8% in the first quarter, and its trade also fell by a large margin. As the economy reopens in the second quarter, trade and investment activities are more dynamic. And such dynamism will only grow quarter by quarter. After a feeble start, the economy is trending up and will maintain such a momentum throughout the year.
However, China is also facing severe challenges. We should be cool-headed about the following four risks.
First, countries that are hard hit by the pandemic are still under lockdown or economic shutdown. Hence orders from these countries have been substantially reduced. In some countries closely connected with China’s industrial chains, the epidemic is still worsening, and the external pressure on economic growth has further increased.
Second, the US strategic shifts towards China pose grave threats and risks to China’s development, as evidenced by a series of measures the US has taken, from trade war to technology war and to financial war.The US is pushing for economic and technological decoupling from China, and imposing higher tariffs on trade. During the epidemic, it suspended the tariffs on 11 kinds of medical products, but soon resumed 25% tariffs. All these have put unprecedented external pressure on China.
Third, the transformation and upgrading of our high-end manufacturing sectors, especially those dependent on trade in intermediate goods, will be greatly affected. The sanctions imposed on Chinese businesses in trade have a direct impact on the transformation and upgrading of the manufacturing industry. For example, the suspension and prohibition of supply of sophisticated chips will inevitably affect China’s semiconductor industry and enterprises. On the whole, there is no problem for the domestic circulation of consumer goods, because the industrial chain is relatively short and the consumer goods manufacturing industry has already formed its own industrial advantages and capacity. Moreover, there is a huge market demand in our country, so the daily life of ordinary people and the market of manufactured goods will not be deeply affected. Some export-oriented enterprises can make a fast turn to domestic sales. As there is a huge domestic market, so long as the policies are in place, the transformation of foreign trade companies will be fast. The most important thing is that it will affect the development of the high-end manufacturing industry, the upgrading of the manufacturing industry up the value chain, and the trade in intermediate goods. All these aspects will face severe challenges.
Fourth, the US makes gross interferences in Hong Kong Special Administrative Region. The US proposed to cancel Hong Kong’s status as an independent customs territory and threatened to cut off the peg exchange rate system between Hong Kong dollar and US dollar. Hong Kong’s status as an independent customs territory was not given by the US, and the US has no right to cancel it. If the US cuts off the peg exchange rate system, it will end up hurting the US dollar trading system. What the US is doing to Hong Kong SAR is to contain China. The reason for its assault on Hong Kong SAR is that the national security law will further integrate Hong Kong SAR into China. As Hong Kong SAR is more closely related to the mainland economically, the US will lose its ability to penetrate and intervene in that part of China.
Hong Kong’s trade with the US only accounts for 6.2% of Hong Kong’s total. So the US moves will only have a modest impact on Hong Kong, who mainly trades with the mainland of China. The Chinese mainland accounts for 50.2% of Hong Kong’s trade,therefore, the impact on both Hong Kong and the mainland will be slight. However, these actions still constitute a challenge for the mainland and Hong Kong.
To conclude, China will maintain a good momentum for a long time to come, a trend that will only be strengthened in the foreseeable future. In the meantime, China is confronted with severe challenges, which call for serious responses. China will take effective, strategic countermeasures against the reckless actions the US and some other countries have pursued to contain China’s development.
Chen Wenling is Chief Economist of China International Economic Exchange Center.