The current state of the Chinese economy

It is not unusual for even serious economists to look at the same economy from very different angles

Shahid Javed Burki January 25, 2021
The writer is a former caretaker finance minister and served as vice-president at the World Bank

Pakistan’s relations with China would depend to a considerable degree on the latter’s economic situation. The promised set of investments China has included in the CPEC investment programme would yield returns if the Chinese economy remains vibrant and dynamic. Recent data released by the authorities shows a rate of growth in GDP of 2.3% in 2020, making China the only major world economy to show positive increase during the year. The country’s GDP surpassed a milestone in 2020, topping ¥100 trillion or about $15 trillion. “’In an extraordinary year, China’s economy was able to record an extraordinary accomplishment,’ Ning Jizhe, head of the Chinese statistics bureau told journalists. ‘It’s a performance that is satisfactory to the people, watched by the world, and can be recorded in the annals of history.’ The Chinese Academy of Social Sciences predicted this month, that China could grow 7.8% in 2021 as it fully bounced back, a pace that would be reminiscent of prior decades. But that was not guaranteed.”

Whereas most other large economies suffered from the spreading Covid-19, in China, where the disease had originated the economy dipped into negative territory only once, during the first quarter of 2020. That was when authorities locked down Hubei Province and its capital Wuhan. Senior Chinese leaders including Wang Yi, its globe-trotting foreign minister, told the world that his country’s fast recovery could lift the rest of the world. International trade would be a major contributor. Chinese officials said that exports hit an all-time high of $2.6 trillion in 2020. Despite a bitter trade war with Trump’s America, China’s trade surplus with the United States reached a record $13.6 billion for the year. China’s share of world exports rose to a record 14.3%.

China’s robust economic performance was reflected in the value of its currency, the yuan or renminbi. Through January 11, 2021, the US dollar was worth ¥6.47, compared with ¥7.16 in May 2020. Beijing has kept its currency on a tight leash; increasing its value seemed to be a part of government policy.

One of the reasons for the appreciation of the value of the Chinese currency is that its central bank has kept its interest rates at a level higher than those of other major world currencies. This has attracted foreign capital deposits into the banking system. According to one assessment, “a strong currency has benefits for China too. Chinese consumers can more ably buy imported goods, helping Beijing nurture a new generation of shoppers. It looks good to economists and policymakers who have long been pressing China to loosen up its tight control of the country’s financial system.”

It is not unusual for even serious economists to look at the same economy from very different angles. I was director of World Bank’s China Operations when, in 1991, the Soviet Union collapsed and disintegrated. The Soviet leadership that oversaw this transition wanted to recast the Russian economy in the image of the West. Soon after the end of the USSR, Russia applied for and received membership in the World Bank and the International Monetary Fund. At that time, both institutions had developed a strong belief in the sets of policies that came to be known under the broad heading of the Washington Consensus. This approach to policymaking minimised the role of the state in economic management. Private sector and the entities that functioned in it were to be left alone to find their own way in the economy. With the Washington Consensus becoming the guiding philosophy, Moscow was advised to quickly move towards this style of economic management. This quick transition was called the “big bang approach” to aligning the former socialist economies with those in the West. The magazine, The Economist, wrote a couple of strong editorials suggesting that Beijing should follow Moscow in adopting the big bang approach to making the transition.

I had a couple of conversations with Rupert Penant Rea who was then the editor of the London-based magazine. I told him that I would not advise the Chinese to follow the Russian example. They should reduce the reach of the state in the lives of the people but do so gradually and bring in the private sector to perform the services it would be better at managing. Housing was a good example. We in the bank, after doing some serious economic work, convinced the authorities in China to let housing be a private sector activity. The Chinese agreed to try our model of making the transition from state ownership of housing to private ownership. This would first be done on a pilot basis in Tsingtao City near Beijing. The World Bank staff designed the pilot programme for making the transition. The Chinese watched the pilot carefully and when they were persuaded the transition would work, they brought the private sector into home ownership. I use this as an example of how Chinese state involvement can be viewed so differently by economic experts.

“China’s economy continues to power ahead with remarkable momentum, leaving other major economies, most of which are still struggling to register some semblance of growth in the dust,” said Eswar Prasad, a professor at Cornell University and former China director for the IMF. “China has cemented its position as the primary driver of what has been dismal global economic recovery.” Prasad’s comment was made after Beijing released the latest economic data. He was of the view that a stronger renminbi “will take more than currency appreciation to get the China-US relationship back on even keel, although this certainly removes one of the potential flash points,” for the new Biden administration. But some economists pointed out that China’s recovery, while impressive at first glance, belied a return to old tactics that China had hoped to shift away from; debt fueled spending on infrastructure and reliance on dirty heavy industries, including state-owned coal and steel production and retail that could help the middle class. For them although the numbers were good, the state of the economy appeared fragile. Real wages had stagnated compared to GDP. “Growth last year came from real estate and infrastructure investment which is a kind of bad growth that China for years has relied on,” said Michael Pettis, a professor of finance at Peking University. Yes, some things did turn out well, economic activity grew, and unemployment was brought down, but many other indexes performed very badly.”

Several commentators feared that the arrival of Covid-19 virus and the response to it of the Chinese authorities could have adverse economic consequences. For instance, Chinese officials cancelled public gatherings associated with the Chinese New Year. “Reduced confidence and travel during the Chinese New Year holidays in February could hamper” first quarter, said Louis Kujis, an economist at Oxford Economics. “But for now, we think the risk of major economic impact is low, given China’s track record of containing outbreaks.” Pakistan can count on at least one economy on its borders for remaining strong and robust.

Published in The Express Tribune, January 26th, 2021.

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