Resilient China

Andrew Sheng and Xiao Geng February 25, 2022 10:43

Instability is the new worldwide normal. From Russia’s invasion of Ukraine and tensions in the Taiwan Strait to the COVID-19 pandemic and climate change, the challenges the world faces are as varied as they are volatile. But, despite their transnational nature, building resilience to them must happen, first and foremost, within the confines of nation-states.

To be sure, effective multilateral cooperation has an important role to play. But intensifying geopolitical rivalries limit its potential. Moreover, even if countries did work together, their ability to address destabilizing global and regional trends and imbalances would depend substantially on the work that each country is doing to strengthen financial, economic, and social resilience at home.

But there are plenty of barriers to effective national-level action. With public trust in government sagging in much of the world, few political leaders have the political mandate or legitimacy they need to make the difficult choices that the situation requires. Widespread mistrust of media does not help matters.

Rather than address these trust deficits in an honest and sustained way, many political leaders and journalists, particularly in the West, have sought to unite their populations by framing and highlighting external threats, especially China and Russia. This is a dangerous distraction that arguably will leave the West less secure.

If countries remain on a war footing, they will dedicate insufficient attention and resources to domestic imperatives like meeting net-zero targets, bolstering demand, delivering quality health care, ensuring adequate social protections, and reducing economic inequality. Without progress in these areas, discontent will only grow, undermining domestic, regional, and global stability further.

China, for one, recognizes that attempting to address domestic challenges while fighting a “war of words” in the media and managing a cold war with the United States is a zero-sum game. With this in mind, in 2020 it introduced its “dual-circulation strategy,” focused on increasing China’s self-reliance and thus its ability to withstand external pressures and disruptions.

As China has begun to implement this strategy, it has also maintained a strict zero-COVID policy. This enabled it, most importantly, to keep total deaths low: had China’s COVID-19 mortality rate matched that of the US, some four million Chinese would be dead. Instead, China recorded just a few thousand deaths from COVID-19.

Beyond saving lives, China’s zero-COVID policy enabled the country to avoid the economic drag of protracted national lockdowns, thereby facilitating a rapid recovery of production and consumption. This gave the government the confidence to implement structural-adjustment policies aimed at improving the quality of growth and advancing the goal of “common prosperity.”

For example, policymakers acted decisively to reduce risks in the real-estate sector and rein in internet-platform giants. While these reforms carried short-term costs – GDP growth slowed to 4% in the fourth quarter of 2021 – full-year growth reached 8.1% (compared to 5.7% in the US), and China’s current-account surplus stood at $315.7 billion (1.8% of GDP).

Further highlighting China’s commitment to addressing imbalances, the country’s macro leverage ratio (a measure of the economy’s overall indebtedness) has declined for five consecutive quarters. In 2021, the ratio fell by 7.7 percentage points, to 272.5%. For comparison, as of June 2021, the macro leverage ratio stood at 286.2% in the US, 416.5% in Japan, and 284.3% in the eurozone.

Fiscal and monetary prudence also helped to ensure that the renminbi’s value rose just 2.7% against the US dollar in 2021, compared to 6.7% in 2020. Moreover, consumer prices climbed only 0.9% in 2021, compared to 7% in the US.

Producer prices did rise sharply in 2021, with annual growth peaking at 13.5% in October, owing to commodity-market volatility and supply-chain disruptions. But the government’s stabilization policies are already working to counteract this trend, reflected in the subsequent slowdown in producer price inflation, which stood at 9.1% in January.

And China is just getting started. In the quest for common prosperity, the government will continue to use a combination of market incentives and fiscal transfers both to expand the economic pie sustainably and to ensure that gains are allocated more fairly. Voluntary charitable contributions will also make a difference here.

A second priority is to achieve a more balanced and disciplined use of capital, with the help of both incentives (such as to bolster productivity growth) and regulations (to protect against speculative practices or monopoly prices). As part of this effort, China is encouraging the use of long-term equity capital, instead of debt.

China’s government is also working to secure adequate supplies of strategic natural resources, energy, commodities, industrial materials, and agricultural products, to shield itself against a hostile geopolitical environment. Furthermore, it is improving its systems for predicting, managing, and mitigating major financial or non-financial risks, including low-probability, high-impact Black Swan events and slow-moving Grey Rhino risks like climate change and biodiversity loss. And it remains committed to reaching a carbon-emissions peak before 2030 and achieving carbon neutrality by 2060.

It is an ambitious agenda, and success is not guaranteed. China’s own track record shows that, in devising and implementing bold policies, missteps are inevitable. But China also has a long history of learning from its mistakes and adapting to changing conditions. In any case, at a time of profound uncertainty and open hostility, China has little choice but to prepare for the worst. Fortunately for the rest of the world, whatever progress China makes in addressing internal imbalances will only bolster global stability.

Copyright: Project Syndicate
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Andrew Sheng and Xiao Geng

Andrew Sheng is a distinguished fellow at the Asia Global Institute at the University of Hong Kong; Xiao Geng is chairman of the Hong Kong Institution for International Finance