Major turbulence roiled the world in 2019, stemming from the protracted trade war between China and the United States, as well as increasingly convoluted geopolitical tensions, record low global economic growth since the 2008 financial crisis, growing trade protectionism and a multilateral trading regime under renewed strain.
Despite external stresses, the Chinese economy has demonstrated strong resilience and has held up well. It continues to perform within a proper range, supported by stable inflation, solid job creation and a basic balance of international payments. Hence, China continues to lead major global economies in growth with its all-year growth rate set to reach 6.1 percent.
China’s 13th Five-Year Plan will be completed in 2020, at which point China’s GDP in both aggregate and per capita terms would double, and the task of building a moderately prosperous society in all respects would be fulfilled. How will the Chinese economy fare in this momentous year?
The Central Economic Work Conference convened at year’s set out an overarching plan charting the course of China’s economic growth. It revolves around the theme “stability.”
Specifically, an array of policies are rolled out to ensure growth, promote reform, adjust economic structure, forestall risks to maintain stability and advance people’s livelihoods. It’s a bid to ensure steady growth of the Chinese economy in the long run and meet the set goals under the 13th Five-Year Plan.
In the year ahead, the world economy is expected to bottom out and return to an upward course, reaching a growth rate of 3.4 percent, primarily boosted by growth in emerging economies. Developed economies are expected to continue growing at a modest rate.
Five features will define the global economy:
• First, low growth, trade and investment;
• Second, low interest rates, high leverage and heightened financial instability (perhaps a new normal);
• Third, trade protectionism posing renewed threats to the global governance system;
• Fourth, more complicated bilateral relations over the long term between China and the U.S., although tensions may ease in the short term;
• Fifth, acceleration of the Asian century, with Asia increasingly seen as the growth hub of the world.
China is expected to grow at around 6 percent in 2020, achieving its goal of doubling GDP and the objectives outlined in the 13th Five-Year Plan. It may face challenges on the following five fronts:
• First, integrating growth between urban and rural areas by facilitating the flow of factors of production.
• Second, deepening reform of state-owned enterprises and empowerment of the private sector.
• Third, further unleashing the potential of human capital.
• Fourth, use of innovation to drive continued industrial upgrades.
• Fifth, harnessing the benefits of a new round of reform and opening-up.
Chief among the tasks in the 14th Five-Year Plan period is to overcome the “middle income trap.” China will continue to pursue a proactive fiscal policy, but with greater intensity, invest more in weak-link areas and channel private capital to more productive use.
In 2020, the fiscal deficit ratio may increase to 3 percent, with the priority on improving the fiscal expenditure structure to the benefit of higher investment efficiency for the government. Meanwhile, investments in projects related to public welfare and infrastructure will increase.
Thanks to the promulgation of the Ordinance on Optimization of Business Environment, incentives will grow for investing private capital from China and overseas. The income distribution system will expand the middle-income group in China. Efforts will be made to stabilize the service sector and spur the growth of small and micro companies and other parts of the private sector.
China will continue to pursue a monetary policy that is appropriate and flexible, with the aim to ensuring that sufficient liquidity, monetary credit and social financing are commensurate with the level of economic development, thus bringing down financing costs. The U.S. Federal Reserve Bank has halted an interest rate drop partly in view of rising inflation. Looking ahead into 2020, the Fed is likely to keep interest rates low, and the U.S. dollar will depreciate, while the RMB will also gain against the dollar.
China continues to further open up its financial sector and attract more foreign capital, thus fostering a more enabling environment for moderately lower interest rates and an expedited M2 supply increase. Lower RRR or interest rates represent viable policy options, and the M2 supply may expand within the range of 8.5 to 9.0 percent. Smooth policy transmission mechanisms will help ensure financial market stability and facilitate financial reform and financial sector opening-up.
Investment plays a pivotal role in shoring up growth, and efforts should be made to promote, in tandem, both an industrial output upgrade and an upgrade in demand. Demand potentials are robust in culture, tourism, information, eldercare, healthcare and sports, among other sectors. With increased investment in these sectors and subsequent industrial upgrades, cultivation of new industries will facilitate more demand. Ultimately, a supply and demand balance at a higher level will be reached.
Robust investment in key industrial sectors and underserved investment sectors can generate a multiplier effect that could serve to elevate basic industrial capacity and promote the industrial chain and modernization.
The rural and surburban areas of China hold the biggest economic potential. It is imperative that continued efforts be made to transform the 600 million farmers in China into a new breed of urbanites, promote the transformation of agricultural development, improve agricultural productivity and expedite the transformation of the peasant economy to a modern agricultural economy.
It is important that factors of production flow unfettered between rural and urban areas and that efforts be made to promote the centralized management of land, industrial transformations and upgrades, together with the development of a more sophisticated market system.
A two-way flow of factors of production, including knowledge, know-how, talent and capital, between the rural and urban areas should be the order of the day, as opposed to the “siphonic effect” of a one-way flow. Only in this way can economic resources in urban areas be mobilized, and consumption and investment potentials unleashed and elevated to a higher level.