China — the big engine that could
The Chinese Communist Party’s Central Committee will gather this week to discuss the parameters of the country’s 14th Five-Year Plan (FYP), setting the strategic economic goals. The decision makers will also develop the economic blueprint until 2035.
Some of the broader themes are already known.
The policymakers will discuss the dual circulation economy, where more emphasis is put on domestic consumption, while export markets remain a core pillar for economic growth. The emphasis on domestic consumption could already be found in the current FYP, but it is about to be accelerated.
The plan is to open China further to foreign investment, especially in the finance and service sectors, which will necessitate broader reforms.
The plan will involve various targets. Observers expect the growth targets to take less of a center stage than in previous FYPs, while the policy makers emphasize high-quality growth. (The last FYP had a growth target of 6.5 percent, which was relinquished for 2020 because of the pandemic.)
Technology will feature high on the list of priorities, as China aspires to become the global leader in artificial intelligence, quantum computing and robotics. The 2035 blueprint is expected to focus heavily on this agenda item. We expect this part to be carefully worded because the “Made in China 2025” policy created problems with trade hawks in the US and the wider Western world.
We should not underestimate the importance of the policies thrashed out this week for China and for the world at large. China is the only major economy set to grow this year, despite the pandemic — 19 percent according to the latest International Monetary Fund (IMF) forecasts. Indeed, the IMF predicts that in 2021, China’s economy will contribute about as much to global growth than all other economies combined.
At the given trajectory, China could surpass the US as the biggest economy in the world. Many notable economists and investors concur with this view. Over the weekend, veteran investor and founder/Co-Chairman of Bridgewater Associates Ray Dalio warned in an op-ed in the Financial Times not to underestimate China, which had become a major economic and political force. Dalio’s most pertinent example was the stock market in China, which was founded in 1990 and has become the second largest in the world by now. If anything depicts exponential growth and development, it is this example.
In the meantime, China too will face headwinds. For one, the US administration’s skepticism on China’s trading policies is by now shared by several other countries in Europe, Australia and elsewhere. Should Joe Biden win the presidency, expect the tone vis-a-vis China to change, but not the message. This may result in China’s trade policies shifting more to other geographies like Southeast Asia.
The yuan is bound to appreciate, as foreign investment pours into the country. Only 2 percent of fixed income in China is owned by foreign investors. Hong Kong and Shenzhen have just cleared Chinese exchange-traded funds for foreign investors. About half of the world’s initial public offerings this year were Chinese. These are rich pickings indeed and the country’s central bank, the People’s Bank of China, will need to consider how to deal with the inevitable currency appreciation.
Within China, policymakers will need to deal with rising unemployment because the pandemic did not spare the country’s labor market either. So far, the pact between the Chinese people and the government entailed little political say and much surveillance in exchange for lifting hundreds of millions out of poverty. It remains to be seen whether that arrangement will hold going forward.
Dalio is right: China is on the rise. Indeed, the country seems unstoppable in its quest for economic and political supremacy. The 2021 growth forecasts of the IMF speak volumes. They translate to the corporate level as well. This year, Mercedes-Benz derived one-third of its profits from China, and the country’s box office sales surpassed North America’s for the first time. Whenever one looks at China, the numbers are mind-blowing to say the least.
• Cornelia Meyer is a Ph.D.-level economist with 30 years of experience in investment banking and industry. She is chairperson and CEO of business consultancy Meyer Resources. Twitter: @MeyerResources