[Lee Jong-woo's Economic Insights] China, the First to Overcome the COVID-19 Recession, Must Lead Global Economic Recovery

Policy and Self-Sustaining Forces for Economic Recovery
Start of Domestic-Centered Dual Circulation Growth Strategy
Expectations for Sanction Easing with Biden Administration Launch
Economic Growth Rate Forecasted at 8% Range This Year

This year, China will receive as much attention in the global economy as the United States. This is because China was the first among major countries to return to a growth trajectory in the second half of last year, and it is highly likely to record remarkable growth again this year.

China's overcoming of the novel coronavirus disease (COVID-19) was initially achieved through policy measures, but over time, endogenous forces played a role. Based on the expansion of global trade, the export growth rate rose to double digits, and consumption activities turned positive compared to the previous year, showing recovery in various sectors. Thanks to this, China's share of exports among the world's top 20 exporting countries increased by 1.6 percentage points from 19% in 2019 to 20.6% last year. Because its economy recovered earlier, China took over the share that other countries had in global exports. On the other hand, the United States has not yet escaped the pains caused by COVID-19. In December, 140,000 jobs disappeared in the U.S. Consumption also declined significantly. Although manufacturing shows a stable appearance, considering the proportion of consumption in the U.S. economy, the manufacturing economy is likely to slow down soon. Contrary to expectations that the economy would stabilize once vaccinations began, the slowdown is worsening, raising the need for additional economic stimulus measures.

This year should also be considered as the year when the dual circulation growth strategy, which focuses on domestic demand, begins in China. The Chinese government plans to raise the share of private consumption, which currently accounts for only 40% of gross domestic product (GDP), to the middle-income country average of 55-60% in the long term. This strategy emerged because the power of investment, which had driven growth, is weakening, and China cannot rely solely on exports. Since this year is the first year of the new growth strategy, strong policies such as deregulation to expand consumption and consumption tax cuts are likely to be introduced. If such policies are implemented, they are expected to have a significant short-term impact on the economy, which is why major forecasting institutions expect China's economic growth rate to reach the 8% range this year.

The external environment is also more favorable this year than last year. With the inauguration of the Biden administration, there is a possibility that U.S. economic sanctions against China will be somewhat eased. Although the U.S.-China dispute is a hegemonic struggle and U.S. checks on China will continue in the medium to long term, it will not take the form of using all means from tariffs to corporate sanctions as during the Trump administration. Instead, the new U.S. administration is likely to pressure China through Western countries to correct unfair trade practices such as intellectual property rights and subsidy payments. This means that the Chinese government must respond differently than it did during the Trump era. At that time, tariffs were met with tariffs and technology disputes with technology, but this will no longer be possible. Internally, China must strengthen its power to respond to disputes, and to this end, the Chinese government will more strongly promote the domestic demand-centered growth strategy.

Until now, China has maintained a policy of supplying liquidity without excess. In the third quarter monetary policy committee statement, the People's Bank of China deleted the phrase "strengthening macro policy adjustment intensity," which had been maintained since COVID-19. Unlike the U.S., which has pledged to maintain zero interest rates at least until 2023, China has eliminated the possibility of further easing.

In November last year, there were 53 corporate bond repayment failures in China. Including failed bond issuances, 488 cases had problems. This was the largest monthly corporate bond default ever, and considering this fact, the weakening of easing policies inevitably becomes a burden. Taking into account that the Chinese government announced it would punish companies avoiding debt repayment, actively reduce debt ratios, and increase bank capital to prevent risks in advance, the burden from policy changes grows even larger.

Although the overall policy framework has changed, there will be no abrupt withdrawal of funds. Since the outbreak of COVID-19, credit loans have increased by more than 50%, and a significant portion of these went to vulnerable groups such as youth and farmers. Given the nature of these loans, rapid fund withdrawal would inevitably cause problems in the economy. The Chinese government is trying to reduce the burden of excessive debt, which is problematic, through buffering measures, as well as create momentum to promote investment and durable goods consumption.

As the Chinese economy improves, the yuan is expected to continue strengthening this year. The yuan appreciated by more than 10% last year due to a weak dollar, China's relative economic advantage over the U.S., and the net supply of dollars. During the recovery from the COVID-19 shock, the U.S. Federal Reserve (Fed) released a large amount of dollars, the undervalued euro returned to its position, and China was the only G20 country to achieve positive growth, all of which were driving forces behind the yuan's strength. Foreign investment in yuan-denominated bonds increased to $108.2 billion by September, twice the amount of the same period last year, which also supported yuan strength from a capital perspective.

This year, the yuan is expected to fall to an average of 6.3 yuan and, in the long term, to a level threatening 6 yuan. The market expects that among the factors that drove yuan strength last year, China's economic recovery will be stronger this year. Considering that China is forecasted to achieve the highest growth rate of around 8% among major countries this year, this expectation is reasonable. The fact that China is expanding capital market openness should also be considered. If the expansion of capital market openness leads to the inclusion of Chinese government bonds in the global bond index (WGBI), an additional $140 billion will flow into the Chinese bond market. This means that, following last year, global capital flows will continue to revolve around Chinese bonds this year, and international liquidity is likely to support yuan strength.

For stock prices to continue rising, a balance between the real economy and finance is necessary. Last year's stock price rise was thanks to finance. Central banks in advanced countries lowered interest rates and increased liquidity supply due to COVID-19, which was the driving force behind the stock price increase. Therefore, the main actor was the Fed. As stock prices rose, new momentum beyond finance became necessary. That momentum can only be provided by the real economy, with China at its center. Contrary to expectations that the global economy would quickly stabilize once COVID-19 vaccinations began, the situation continues to worsen. Vaccinations have not yet progressed enough to improve the economic situation, and the speed of the third wave is too fast, resulting in this outcome. The role of China, which first overcame the disease and achieved economic recovery, has become even more necessary.