An employee inspects cargo handling equipment at a container terminal in the China (Shandong) Pilot Free Trade Zone in Qingdao, Shandong province. [Photo by Zhang Jingang/For China Daily]
Nation set to overtake United States in economic ranking earlier than forecast
China could emerge from the coronavirus pandemic with a more dominant economy, replacing the United States as the world’s largest within the current decade, according to experts.
The world’s second-largest economy recorded 3.2 percent growth in the second quarter, according to the National Bureau of Statistics, and has the potential to lead the global economy out of recession in the months ahead.
Jeremy Stevens, chief China economist at Standard Bank, said China is the only major country to successfully balance containing the COVID-19 pandemic and reviving its economy.
“The Chinese economy will certainly outperform almost all others, probably by quite a wide margin,” said Stevens, who is based in Beijing.
“China’s response to the pandemic has been far more focused, forceful and effective than elsewhere. Policy has focused on keeping businesses afloat and people employed, and this has paved the foundation for the swift recovery.”
In the US, there have been more than 155,000 deaths from the virus, according to Johns Hopkins University. With the US economy contracting by a record 32.9 percent in the second quarter and on track for an 8 percent yearly slump, China’s economy may become bigger than that of the US sooner than previously anticipated.
The Centre for Economics and Business Research, a consultancy based in London, predicts this could happen as early as 2029, four years ahead of the forecast in its annual World Economic League Table published before the coronavirus crisis began.
Douglas McWilliams, the consultancy’s deputy chairman, said, “We will not have a definitive prediction until we update our table later this year, but our best guess at this stage is that China will overtake the US at least two years earlier than expected and possibly up to four years earlier.
“China has managed the aftermath of coronavirus much more efficiently than Western economies and will therefore catch up with these economies rather more quickly,” he said.
Stevens said the gap between the growth rates in China and the US has not been as wide since the start of the past decade, when China was still enjoying double-digit economic growth.
“This is a deviation from the margin last seen in 2010, and China’s economy is likely to expand at a decade-high in 2021 owing to favorable base effects,” he said.
Kerry Brown, director of the Lau China Institute at King’s College London, said the crisis demonstrated the effectiveness of the Chinese governing system, helping it to bridge the gap with the US in terms of the size of its economy.
“The centralized nature of economic decision making in China means that in times of crisis like this, the Chinese government has more levers available to it to control things that might stimulate the economy and employment,” he said.
“China still has plenty of potential sources of domestic growth－consumption for instance－and it can now cultivate these further. That means it will be able to face the current issues with more flexibility and readiness than others, although the question is whether this will be sustainable.”
Route to recovery
Edward Tse, founder and CEO of Gao Feng Advisory, a management consultancy, thinks the strength of China’s economy offers a pathway to global recovery.
“China’s role in the world in terms of its contribution to global GDP growth continues to be very significant and is probably going to be even more significant because the rest of the world is lagging so far behind,” he said.
“It is important that other countries take note of this, but at the moment I am not sure they are. China is now so important to how we all get out of this.”
President Xi Jinping made clear in a letter to global CEOs published on July 16 that the fundamentals of China’s long-term economic growth had not changed despite the pandemic.
He said the country remained committed to deepening reform and further opening up its economy to provide a better environment for investment and one in which Chinese and foreign enterprises can thrive.
Five days later, Xi reinforced this message. Speaking to a symposium of Chinese entrepreneurs, he said the government remained committed “to creating a market-orientated, law-based and internationalized business environment”.
Koh King Kee, president of the Centre for New Inclusive Asia, a think tank based in the Malaysian capital Kuala Lumpur, said this would make China an attractive place for investment as the world recovers from the pandemic.
“Xi’s pro-business statement will undoubtedly provide a big boost to business confidence in China, both to foreign and local enterprises,” he said.
Even before the pandemic, there was evidence that foreign companies were finding it easier to do businesses in China.
A new Foreign Investment Law took effect on Jan 1, opening up other sectors for investment and giving foreign companies the same rights as domestic ones by entitling them to “national treatment”.
According to the World Bank, in terms of the ease of doing business, China ranked fifth among 190 nations in improvements made since 2015.
In its Doing Business 2020 report, China ranked 31st among countries having the best environment in which to do business, ahead of France (32nd), Israel (35th) and the Netherlands (42nd), and only just behind Japan (29th), Germany (22nd) and Canada (23rd).
Parag Khanna, founder and managing partner of FutureMap, a strategic advisory company, and author of The Future is Asian, said China’s openness has been particularly evident in the financial markets.
“It has become clear in recent months that China is keen on capital account liberalization, and Western asset managers have been increasing their exposure to China’s debt, equity and bond markets despite American political pressure to disengage,” he said.
“The lifting of foreign ownership caps in the banking and insurance sectors and Tesla’s growth in China speak to the market opportunities,” he said, referring to the US electric car maker and clean energy company.
Andrew Sheng, a former central banker and financial regulator and now distinguished fellow at the Asia Global Institute at the University of Hong Kong, said this openness will be beneficial to China as it emerges from the coronavirus crisis.
“The commitment to deepening reform and further opening-up is welcome and necessary if China and the world economy are to recover strongly,” he said, adding that even with this commitment, attracting international investment will remain a challenge.
“One must be realistic that global corporate investment will be weak this year until the pandemic is controlled. Many global corporations are struggling to control the damage to their own balance sheets, so they will have fewer resources to do long-term investments abroad,” Sheng said.
Many analysts believe China will turn the crisis arising from the pandemic into an opportunity to redouble its efforts to become a leader in the industries of the future.
The National People’s Congress, the country’s top legislature, approved a plan in May to invest $1.4 trillion over the next six years in technology, ranging from 5G to artificial intelligence, with local governments set to work with the country’s private high-tech giants.
With national champions such as Huawei, China is already way ahead of rivals in 5G mobile communications, an enabler of vital new technologies such as the internet of things and driverless cars.
China also wants to be a leader in the green revolution, with major investment being sunk into clean energy technology.
Many entrepreneurs at the symposium addressed by Xi were from the technology sector, and they will be at the forefront of China’s efforts. The country has already set itself a deadline of becoming a global technology leader within 15 years.
Sheng believes China will seize the opportunity presented by the pandemic. He said that unlike after the global financial crisis of 2008, which saw China respond with unprecedented levels of infrastructure investment, the focus now will be on the tech sector.
“This time round, smart investing in people and software, especially green products and services that are less carbon-and resource-intensive, will pay off better than huge increases in hard infrastructure, which happened a decade ago,” he said.
Koh, from the Centre for New Inclusive Asia, said China is already trying to build a new economy, and the current crisis will further act as a catalyst for change.
He believes the scale of investment in “new infrastructure” such as big data centers and 5G, new energy vehicle charging stations, high-speed railways and long-distance power transmission to bring renewable energy to cities, is ahead of anything taking place in the West.
“Such investments are in line with China’s aim to transition from a polluting, export-led manufacturing economy toward one that is high-tech and service-driven. China’s economic transformation ambition is well supported by its existing leading edge in 5G and other technologies,” he said.
Tse, from Gao Feng Advisory, the author of China’s Disruptors: How Alibaba, Xiaomi, Tencent and Other Companies are Changing the Rules of Business, said that despite the pandemic, China is entering a new era of innovation.
“China has a lead in so many of the disruptive technologies that are going to shape the industries of the future. What you have got in China is this ecosystem with national government, local government and the private sector all working together in a national technological effort. It is completely unique,” he said.
“What you have also got is this entrepreneurial culture and this huge market where companies can try out new ideas. Whatever the rest of the world decides to do in terms of its relationship with China, this domestic market will accelerate innovation, and we have seen that happen already.”
Some observers believe that not only the pandemic, but trade tensions with the US have also spurred China’s technological effort.
The country’s biggest semiconductor maker, Semiconductor Manufacturing International Corp, was floated on the Shanghai Stock Exchange on July 16, with its shares surging by 245 percent.
With Washington attempting to block Chinese technology companies from using US chips, the focus now is on producing them in China instead.
Khanna, the global strategist, said, “The US-China trade war has already served to accelerate China’s efforts to upgrade its semiconductor and other industries.”
He said that whatever the pressure, China has a long-term commitment to technology, and is unlikely to be diverted from this path.
“China’s focus for 20 years, and each successive five-year technology plan, includes a wide swath of investment priorities, from solar power to medical devices,” he said.
It is difficult to predict the winners in the post-coronavirus world, as cases continue to rise amid the prospect of second and third waves.
Sheng is among those who did not anticipate the difficulties advanced countries such as the US would experience in tackling the crisis.
Few people predicted the US would bungle its handling of the pandemic to such a degree, he said.
Sheng believes the key battleground will be in delivering green products to a consumer base with a heightened awareness of global risks such as climate change, based on the experiences learned during the pandemic.
After the pandemic, customers will want green products with a reduced carbon footprint that are less-polluting, he said.
Sheng also thinks domestic consumption will be important to China as its economy recovers.
“China has reached the Ford moment, where if you pay your people better, they will buy your own product. Domestic consumption will be the key driver of growth for China, but it has to be green.”
Koh also believes domestic consumption holds the key for China’s recovery.
The country’s domestic consumer market is set to rise by $6 trillion from now until 2030, more than the forecast increase in both the US and the EU combined, according to McKinsey & Co, the management consultants.
“This domestic market will spur economic growth. China has only to make a strategic shift inward to mitigate the negative impact of the (coronavirus) crisis and maintain its economic growth trajectory,” he said.
Wang Huiyao, founder and president of the Center for China and Globalization, an independent think tank based in Beijing, said China also holds the key to global recovery.
“It has already found a way to contain the virus and maintain economic growth, which is something other countries may look to. President Xi also sent a signal to multinationals at the recent CEO symposium that China is open for business,” he said.
Brown, from King’s College London, a former diplomat at the British embassy in Beijing and author of China’s World: What Does China Want?, believes the worst outcome of the crisis would be heightened tensions between the US and China, whatever the rhetoric in the US presidential election.
“It is clear that the US and China do not share common values or a common world view, but they have to work together on common global problems,” he said.
“This will likely be a bipolar world that will need constant management, but that does not mean a cold war. The integration between the two is too deep for a situation like that which existed between the USSR and the US to occur again.”
McWilliams, from the Centre for Economics and Business Research, the author of The Inequality Paradox: How Capitalism Can Work for Everyone, believes the pandemic might eventually be regarded as the moment the world shifted decisively eastward.
“The global economy was already tilting eastward, but as a consequence of the virus, the tilt will certainly become more rapid. Not just China, but most other fast-growing Asian economies, have managed the virus much better than the West, especially the US,” he said.
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