As the coronavirus fallout is spreading in Western economies, China’s rebound has begun. Global recovery requires global cooperation, however.
Today, international interest in the annual Two Sessions of China’s top legislative and political advisory bodies – National People’s Congress, and Chinese People’s Political Consultative Conference – which starts on Thursday, is exceptionally high.
Due to the global pandemic, the Sessions take place under strong anti-epidemic measures, including social distancing, and will be significantly shorter and rely more on videoconferences. Such measures are in line with the science-based health policies, which the central government adopted in late January.
Apart from their sociopolitical significance, the Two Sessions herald the rebounding of the Chinese economy, even amid the global pandemic.
From virus containment to economic rebound
In China, big business has operated with near full capacity since mid-April. Factories and energy plants are humming. Stores are reopening.
Of course, there’s no immediate return to the pre-virus world. Yet China’s new normal differs dramatically from that in the US and Euro area, thanks to proactive governance and science-based policies to contain the virus outbreak.
In China, the rebound of the economy began in March-April. In the US and Europe, it could ensue more broadly only after the second quarter. But even those hopes could be undermined by premature exits from the lockdown, new virus waves and residual clusters.
In the first quarter, China’s growth shrank 6.8 percent. However, the rebound could raise the second quarter data close to 4 percent, while the third and fourth quarter could prove close to 5 and 6 percent, respectively. That would leave the 2020 result at 2 percent, as the IMF has predicted.
Assuming peaceful international conditions, faster rebound could improve the outcome, however. Despite the dire international horizon, China’s economy has potential for an upside surprise.
More fiscal expansion and faster response to crises
This year marks the last one of the 13th five-year (2016-20) period. But, even if China could see a V-shaped recovery, can the country deliver its promises of improving living standard, eradicating abject poverty and environmental sustainability?
Here’s the short answer: It’s a precarious balancing act. More fiscal expansion is needed to support the economy, while improved reporting systems are likely to be implemented to prevent future public-health emergencies.
Long-term objectives – doubling living standards, eradicating poverty and reducing pollutants – will prevail but they can be effectively executed only after the pandemic is fully contained worldwide. Ironically, the past months’ economic slump has translated to a dramatic, though temporary fall in emissions.
The greatest challenge in the coming months will be to overcome the current misalignment between supply and demand. During the 2nd quarter, the supply-side performance has rapidly improved as economic capacity is almost back to normal and industrial production is up. Last month, even the export sector’s performance was strong. The government’s strong back-to-work push is paying off.
Demand-side story harder, likely more challenging for West
The demand-side will take more time. In the months of strict quarantine measures, e-commerce sales took off dramatically as people resorted to online shopping. Retail and shopping malls, clothing and cosmetics and other consumption-led sectors will take longer to normalize.
In the West, the demand-side story will prove even more challenging, due to greater virus impact and longer delays in the return to full employment.
As long as a vaccine against the virus and effective therapies are not available, uncertainty will constrain private investment. But in China, that has been offset by government-led infrastructure investment, which is likely to remain a key growth driver until full stabilization.
Fiscal policies are likely to be strengthened, with expected measures such as raising the fiscal deficit rate to 5 percent of GDP and issuing more than $420 billion (3 trillion yuan) in special treasury bonds to boost fiscal funding.
In turn, fiscal accommodation is likely to be supported with easing of monetary and credit policy. In the past four months, newly increased social financing and loans have seen new highs. The demand for financing is recovering as production has resumed. That’s vital for improved employment during these challenging times.
International landscape key to longer-term future
In China, the worst economic damage may be behind; in the US and Euro area it’s still ahead. Despite the challenging first quarter, this damage is unlikely to penalize China’s strong long-term economic fundamentals. In the West, the fallout of the outbreak is likely to prove more protracted.
In the first quarter, US GDP growth fell to -4.8 percent; but the second quarter, it could plunge close to a whopping -40 percent, according to recent US reports. In the Euro area, growth fell to -3.8 percent in the first quarter but that’s only a prelude to the expected double-digit plunge in the second quarter.
Since such economic outcomes can be attributed to the mishandling of COVID-19 risks, they are likely to result in political tsunamis in the West in the coming months.
In light of the global economic outlook, the key question is whether the coronavirus lessons will foster international cooperation, which is the only way out, or result in global conflicts scenarios, which would further weaken external demand.
Responsive and responsible governments would delay and prolong the current trade-truce schedules. Yet, the Trump administration is neither. The White House’s misguided trade war and COVID-19 mishandling has already caused US debt to soar record-fast to $25.3 trillion.
As US federal debt to GDP ratio is now close to 120 percent – at par with that of Italy amid its debt crisis in 2011-12 – such leverage, which the White House and the Fed will have to further increase, could prove costly to global economy.
A version of the commentary was published by China Daily on May 20, 2020