The global economy is going through a rough time. Despite the start of COVID-19 vaccination, many countries are still sustaining tough lockdown measures.
It would seem that growth can hardly be expected in this context, but one country, namely, China, has actually bounced back by the end of last year. According to the National Bureau of Statistics of China, the country’s GDP grew 2.3% in 2020. China seems to be claiming the role of a locomotive of global economic recovery, even despite the numerous barriers the country encounters in the global arena. Another question is whether China will be able to cope with the challenging role and come up with a new Marshall Plan to save the world.
A locomotive of global economy
When it comes to China, the term ‘locomotive’ does not seem like much of an exaggeration: this year at least, China’s economy will definitely grow faster than that of any of its rivals. China is expected to show an 8% growth this year, according to Valery Yemelyanov, an analyst at Freedom Finance. The US GDP will grow by 3.5%, while Europe and Japan will be recovering at 3.5% and 2.5%, respectively.
“China has been the driver of global economic growth for decades. The current crisis is no exception,” Yemelyanov notes.
The role of China and Asia as a whole is growing consistently, says Olga Belenkaya, head of macroeconomic analysis at Finam Group; the trend is likely to continue. The center of economic gravity is shifting from the West to the East – to Asia, Bloomberg Economics suggests in its forecast of potential GDP through 2050. By 2035, the company forecasts, China will have overtaken the US to become the world’s biggest economy. According to a CEBR estimate, the Chinese economy will raise to the top position overtaking the United States even earlier, in 2028.
The country’s booming demand for oil, metals, and energy could well be the magic formula that would bail the global economy out of recession, believes Artem Genkin, Doctor of Economy, Professor, President of the NPO “Center for Protection of Bank Clients and Investors”. And that formula can actually work even if certain regions slide into the third, fourth, or more consecutive waves of the pandemic.
“I would say China’s recovery being so fast and irreversible (a guarantee that there is no returning to the ‘Wuhan scenario’ with a total lockdown and disruption of supply chains both inside the country and in foreign economic relations) is a most decisive factor that can ensure stability and even positive price dynamics on global exchanges, primarily commodities,” Artem Genkin says.
The Marshall Plan made in China
China can indeed become a driving force of the global economy, including thanks to its support programs for other economies – primarily, its Asian neighbors. China has already launched several support programs of this kind, the Belt and Road and the Community of Common Destiny initiatives being among them, notes Vladimir Milovidov, Head of the Department of International Finance at the Moscow State Institute of International Relations (MGIMO).
“China allocates substantial financial resources in the form of grants, loans and other instruments, to help both developing and developed countries. According to public estimates, China invested $350 bln between 2000 and 2014,” Milovidov comments.
There is a system of institutions in China that support the implementation of such projects. China International Development Cooperation Agency, established in 2018, is the key element in this system. Recipients seeking assistance and financial support sign a cooperation agreement with the agency. Twenty-nine countries have already closed deals. Under the Belt and Road initiative, 160 countries also signed memorandums of understanding.
“The scale of China’s program to support economic development significantly exceeds the one of the Marshall Plan that involved 17 countries with some $135 bln – 140 bln of provided funds in today’s prices. China has almost tripled this sum,” Milovidov says.
According to Artem Genkin, China’s loan assistance is more often individual off-the-record offers rather than public offers to a group of countries. The further collection reflects the individual approach to the borrower. Thus, any liquid asset, from a port to a mineral deposit, can, by a mutual agreement of the parties, be transferred to the lender as a means to settle the debt. As of now, the basic loan offer can be customized and presented to certain countries or regions under a PR campaign of ‘post-COVID restoration plan’, the expert believes.
“This would make the local elites and the ‘street’ more amenable when discussing and adopting such loan offers,” Artem Genkin says.
Obstacles to China’s growth
But there is an entire range of challenges for China that put into question the rate of the economic recovery of other countries. The key one is the deteriorating relations with the US, says Olga Belenkaya: the ban on the transfer of technology and restrictions on exports of high-tech products from China to the US and their allies could be the most painful of them. The US has recently been engaged in delisting Chinese companies from US stock exchanges.
“Donald Trump has set a goal to reduce the US’s foreign trade deficit with China and stop the ‘theft’ of US technology, and then disengage Chinese economy from the American one. Joe Biden considers China the main strategic rival of the US and intends to force China “to play by international rules” with the help of a wide coalition of allies,” Olga Belenkaya notes.
However, it seems at the moment that Biden’s victory is beneficial to China given the expected de-escalation of trade wars and a more predictable policy. Among other risks are the Chinese debt-ridden nonfinancial sector and compliance risks. According to the expert, even the largest businesses in the country depend to a great extent on the benevolence of the Communist Party whose decisions are sometimes quite unexpected for the market. A regulator’s recent pressure on Alibaba Group Holding is a case in point.
Still, the slowdown in the growth of China’s economy may become the most significant obstacle. In recent years, the GDP growth rates have shown a decline, and 2021 may be the last year when the country boasts outstanding indicators, Valery Yemelyanov notes.
“China has survived the consequences of industrialization and urbanization that Europe and the United States were facing in the early 20th century. China’s labor force has stabilized, the population is aging, and the country is going through digital transformation. This will lead to a reduction to a more moderate 4-5% in the average annual growth rate within the next decade,” Valery Yemelyanov says.
This means that countries with large growing population yet low standards of living, including India, Indonesia and African countries, may replace China as drivers of the world economy. And China definitely cannot become the locomotive for global economic recovery alone in case the US and European economies face recession once again.
“China’s role is going to be much less prominent without efforts to restore regular economic activity in the developed countries. There are developing countries where China is strengthening its positions, but their demand for Chinese products is not yet able to compensate for a shortfall in demand in developed countries,” Vladimir Milovidov notes.
According to China’s customs statistics, last year’s export growth was 4% as compared to 2019, while imports decreased by 0.7%, Milovidov notes. In fact, China did not contributed to the growth of other countries’ economies, but the global demand for Chinese products triggered the growth of production in the country. This example is definitely taken out of a complex context, yet it shows that the situation is ambiguous, the expert emphasizes.
“In the 1940s, a manufacturing country played the key role, while today a country with the largest effective demand is the most powerful economy. In this regard, China yields to both the United States and the European Union. China can solve this issue solely through efforts taken jointly with consumer countries,” Director General of the Institute of Regional Problems Dmitry Zhuravlyov agrees.
“Today, China is what the United States was 50 years ago. Similar to the United States during the 1960s and 1970s, China is highly interested in globalization as a country which has a globalist economy and is deeply integrated into global value chains. The answer to the question on China’s role as an engine in the post-COVID world lies in the intricate web of world economic connections and interests,” Vladimir Milovidov explains.
By Olga Blinova