Over the last year there have been pessimist comments about how the Chinese economy is gradually eroding and how the trade war with the United States is affecting its growth. There have also been reports that dire aspects associated with the Chinese economy have been over stressed.
The latest Asian Development Outlook (ADO) 2019, ADB’s flagship economic publication in its report issued in the first week of April has clarified matters. It has been stated that China’s economy will continue to grow above 6 per cent this year and next in line with the Chinese government’s growth target of 6 to 6.5 per cent. It may however reduce a bit from the current 6.3 per cent to 6.1 per cent in 2020. This indicates that China’s economy remains strong despite the growth slowdown in recent years.
ADB Chief Economist Yasuyuki Sawada has observed in this regard that on the demand side consumption has confirmed its role as the main driver of growth by contributing 5.0 percentage points, up from 3.9 points in 2017. This appears to have taken place because of the Chinese government reinforcing its support for private consumption when it introduced personal income tax reform comprising new tax brackets and a higher standard allowance effective from October 1, 2018. Additional deductions have also become part of the regulatory regime since January 1, 2019.
On the supply side the ADO has noted that services have remained the main driver of growth despite slowing from 7.9 per cent of growth in 2017 to 7.6 per cent in 2018. It may be noted that economic analysts have pointed out that services contributed 3.9 per cent points to Chinese gross domestic product (GDP) growth, lifting this sector’s share in GDP from 51.9 to 52.2 per cent.
It would be worthwhile at this juncture to refer to certain significant comments made recently in March this year by the Premier of the State Council of China Li Keqiang in his speech delivered during the Second Session of the 13th National People’s Congress of China.
He referred to the mounting downward pressure on the Chinese economy and correctly suggested that the policies and measures that China adopts should ensure stable expectations, stable growth and structural adjustments. This, he said, would help to forestall and control risks and help in the adjustment process of the economy. He went on to inform that the Chinese authorities would continue to moderately expand the issuance of local government bonds to replace outstanding debts in order to reduce the interest payment burdens of local governments. He also assured that the central government would encourage the adoption of market approaches to solve the issue of maturing debts on financing platforms and make sure that projects financed by such debts are not stopped half way. Functionally, this has of course been a wise step.
Li Keqiang also reiterated the need of another important measure- the achieving of stable and diversified employment. The Chinese government has agreed on certain measures that would be applicable for all developing countries with high populations, including Bangladesh. China has decided to ensure employment for key groups such as college graduates, demobilized military personnel and rural migrant workers. They have also underlined the need to give greater employment support for urban jobseekers facing difficulties in securing employment. Interestingly, it has also been proposed by Li Keqiang that enterprises hiring staff from among rural poor people or unemployed urban residents will be entitled to a fixed amount of tax and fee deductions for subsequent three years.
The Chinese government has also agreed on making regulations easier to follow. They are now emphasizing that transparency in the regulatory structure makes implementation of such rules that much more implementable. Steps are also being taken to make rules and legal provisions more unified at all administrative levels. It has been correctly assessed that this would reduce chances of corruption, introduce impartiality and avert discrimination.
Another interesting measure has received the support of the Chinese authorities. They have appropriately also understood that major developments in the current digital scenario require promotion of a credit rating-based regulation structure and reform within the paradigm of internet usage. China understands that this would help to better enforce laws and also environmental protection, fire prevention, tax collection and market oversight. This would also ensure that those who act in contravention of law can be easily identified and punished.
As a consequence of the trade war and tariff dispute China has also taken the important step of not only coordinated law enforcement by different government departments and in the overhauling of government punitive measures but also in addressing duplication in punitive enforcement. This is already paying dividends for China’s export industry. Another significant aspect is being introduced within the Chinese economic infrastructure from this year. Average broadband service rates for small and medium enterprises are being lowered by another 15 per cent, and average rates for mobile internet services will see further reduction by 20 per cent. Mobile phone subscribers, as in the case of Bangladesh can now be able to keep their numbers while switching carriers.
After their evolving dispute with the United States authorities the Chinese government has also urged all concerned to take steps for promoting coordinated research pertaining to technology innovation and science and technology programs. They are also being urged to speed up development through platforms for sharing data and necessary services. This is being considered as one way to use intellectual property rights legally and also to advance their application for industrial application.
In addition, China to achieve the required momentum for the One Belt One Road initiative is also increasing support for basic research and application-oriented basic research that may promote innovation. It has also been agreed in this context that a careful scrutiny will be undertaken in all important national laboratories to identify areas where improvements and rectification might be required. This will also include identifying steps that would assist in improving management of major science and technology programmes. This is something that our relevant authorities need to undertake- sooner the better.
One can see why China is continuing to march forward despite several contentious issues that have been raised in the recent past by several developed countries.
Within the international horizon, China is now getting ready to convene a major Summit in late April to remove hesitation among several countries with regard to certain aspects pertaining to their participation in the OBOR initiative- debt, transparency and growing international Chinese influence.
China, to the disappointment of German Chancellor Angela Merkel, has gained a major victory by convincing Italy to become the first G-7 nation to formally sign on to the OBOR plan in March. Italian leader Conte is due to attend the Summit that China is convening, He has explained Italy’s decision to be part of the OBOR initiative, because according to him this would bring much-needed investment and boost trade between Italy and China. It would however be correct to understand Italy’s pro-active association with the OBOR arrangement from another viewpoint. Only a few days before Xi’s arrival, Italy had to massively correct its economic forecast for 2019. Instead of GDP growth rate of 1.5 per cent, as predicted by the government in October last year, Rome will now be happy if it achieves zero growth. The latest economic outlook by the Organization for Economic Cooperation (OECD) is even bleaker. It anticipates a 0. 2 per cent contraction in GDP. One of the major reasons for this downward trend is the many economic uncertainties that are leading Italian citizens to become cautious consumers.
It may be noted here that some other European countries- Hungary, Poland, Greece and Portugal have also signed memoranda of understanding with China in this regard.
However others in the West have been less keen to jump on board. Nevertheless, they are carefully monitoring the emerging matrix and also how the challenges are being overcome. The Chinese have responded to the existing doubts by commenting that the OBOR exercise will not be a debt trap but will be open, inclusive and transparent for all the like-minded countries.
Analysts have pointed out that the European Union, China’s largest trading partner, has also been in a bind as to how they will respond. They are presently caught up with the Brexit imbroglio and also differences of opinion ahead of the EU election towards the end of May. This is creating its own areas of convergence and divergence.
It has been reported in the media that when Chinese President Xi recently visited Europe a few weeks ago, Europe’s top leaders told him that they wanted a fairer trading relationship with China. At the same time they signaled an openness to engage with OBOR if it meant more access to the Chinese market.
China has been under pressure to show to the world that the Belt and the Road effort remains popular, despite cooling enthusiasm from some governments- Sri Lanka, Malaysia and the Maldives- where new Administrations are wary of deals struck with China by their predecessors. China on the other hand has touted the success of their US Dollar 57 billion efforts for implementing the China-Pakistan Economic Corridor, a major Belt and Road scheme that is viewed by India with suspicion. Chinese leadership has underlined their success with regard to this venture by pointing out that 20 per cent of the funding for this Corridor has come from Chinese loans. The rest has been made up of direct Chinese investment and free grants.
However, success in the economic engagement parameter on the part of China with the rest of the world, to a great extent, still depends on resolving the existing differences between China and the USA on the following aspects- intellectual property, forced technology transfer, non-tariff barriers, agriculture, services, purchases and enforcement. Bilateral discussion between both parties is on but concurrence has still not emerged in the crucial areas. Once there is agreement, China would be able to meet their economic expectations. They will also have to come to an agreement format with the EU leadership regarding the proposed Joint Summit Statement that China is trying to issue after the coming meeting in China. Chinese Premier Li Keqiang will, in this context, need to come to an understanding with EU Council President Donald Tusk. That will not be easy.
Muhammad Zamir, a former ambassador, is an analyst specialized in foreign affairs, right to information and good governance, and can be reached at email@example.com