Gauging China's economic resilience from a comparative perspective
Pessimism bias and overoptimism are to be avoided.
"No two leaves are alike, and yet there is no antagonism between them or between the branches on which they grow." -- Mohandas Karamchand Gandhi
Global growth prospects have weakened significantly this year, with growths of the United States, China and the eurozone all projected to slow down amid unusually high uncertainty.
"A sharper-than-anticipated deceleration in China as a strict zero-COVID strategy is tested by Omicron" has been listed by the International Monetary Fund in its World Economic Outlook update as one of the downward risks to the global outlook.
China's central bank immediately announced interest rate cuts after the release of the July figures on Aug. 15, which was expected to lower financing costs for the real economy, help expand domestic demand and shore up economic growth.
Such a response, though called by some as "surprise" rate cuts, attests to policymakers' decisiveness to adapt to new changes in economic and financial situations and their pre-emptive approach to striving for the best results of the year against headwinds.
In July, the country's major indicators from industrial output, service industry production, import and export, total retail sales of consumer goods to fixed-asset investment all maintained year-on-year growth, with a continuous drop in the surveyed urban unemployment rate and steady improvement in the supply of production factors including energy resources and farm produce.
Moreover, industrial upgrading and green transformation strengthened, reflecting the country's unabated resolution to harness positive structural change wherever possible to foster new growth drivers.
But the prospect is not all rosy. Spokesperson Fu Linghui with the National Bureau of Statistics (NBS) was frank with the challenges at a press conference, saying more efforts were needed to consolidate the recovery momentum.
China's economic recovery showed a marginal slowdown in July as weakening economic activities worldwide, higher inflationary pressure, resurgences of COVID-19 in multiple localities, heat waves and rainy weather have concurred to heighten the pressure of securing a steady economic expansion. -- Fu Linghui (China NBS Spokesperson)
Given the size and influence of China's economy, a deep look into the economic operation of the largest contributor to the world's economic growth might help overcome pessimism bias and overoptimism, both of which are to be avoided in resilience assessment.
ECONOMIC STIMULUS, FEEBLE OR NOT
Some analysts maintain that China's "policy support may be too little, too late and too inefficient." It's worth asking: by what standard is this judgment made?
When it comes to macro-economic adjustment, China has got a different story to tell. Indeed, there was no quantitative easing in China's policy toolbox. The country has also been refrained from using flood-like stimuli for macro-economic control. Priorities have gone to cross-cyclical adjustment, which entails more targeted adjustment and a balance in tackling immediate needs and boosting future development.
One area to watch is the pace and intensity of special local government bond issuance. To cope with downward economic pressure, China has moved to align its special bond management policies for 2021 and 2022 to pursue the best possible stimuli.
Normally 60 percent of the full-year bond quota approved by the central authority tend to be utilized in the first half, otherwise it would be too late to drive that year's growth.
But last year, only 30 percent of the quota was utilized from January to June, with the remaining majority all used in the second half to form a stimulus in the first half of 2022. And the alignment did not stop there, with quickened bond issuance this year. At the end of July, a total of 3.47 trillion yuan (514.4 billion U.S. dollars) of new special bonds were issued. That means the full-year issuance quota has been almost used out six months in advance, reflecting the Chinese style of aggressiveness in macro-economic adjustment.
Apart from special bonds, tax and fee cuts and exemption, China also used structural monetary policy tools such as re-lending, re-discounting and reducing reserve requirements to strengthen support for micro and small firms that were hard hit by the epidemic. Special relending were issued to support the clean and efficient use of coal, sci-tech innovation and inclusive elderly care.
All these practices show that rather than merely seeking short-term effects, China hopes to enhance the vitality of the economy through continuous support, cultivate long-term drivers of economic growth, and realize the upgrading of economic structure.
SPECTER OF WEALTH EVAPORATION
People might notice the complaints from some venture capitalists in the U.S. and China about the approaching of "a winter for venture capital," a metaphor for funding shortage that began last year as investors had to grapple with a slowing economy and worried about the end of a venture capital boom.
Is the winter really coming? Are China and the U.S. experiencing the same winter?
Answer to the first question hinges on whether there is a large-scale wealth evaporation, while that to the latter might require a closer look into the asset composition of Chinese and American people.
For Chinese households, real estate and bank savings take up the majority chunk of their assets, accounting for 65 percent and 20 percent respectively, whereas U.S. households' assets are mainly composed of stocks and bonds.
If the Chinese government could adhere to the principle that "housing is for living in, not for speculation," continue to focus on meeting households' essential housing demand and effectively defuse financial risks concerning real estate, volatility in property prices would be checked, which will help ward off a property-woe-triggered wealth evaporation.
As for bank savings, it is worth noting that China's household savings rose 7.6 trillion yuan in the first five months of this year, in spite of unemployment difficulties and soft demand. China has remained and will continue to be a country with a high saving rate.
By comparison, stocks and other financial products make up a big proportion of U.S. residents' assets. The U.S. stock market rout in recent months, partly due to tightening liquidity and growing recession risks, wiped out billions of dollars in market value and reduced U.S. residents' wealth to a large extent.
From a longer term perspective, the U.S. is approaching the end of a financial cycle, with the stock market being overvalued by the standard of the market cap to GDP ratio.
The ratio, also known as the Buffett Indicator, is named after famed value investor Warren Buffett and looks at the total market value of stocks relative to the overall size of the economy.
In theory, a mature capital market should be valued at 80 percent to 120 percent of GDP. If the market cap is less than 80 percent of GDP, it means the capital market is underdeveloped, and if it exceeds 120 percent, then there are potential bubbles in the market.
The past three decades have rendered China's capital market closer to maturity, with the Buffet Indicator generally staying below 85 percent. In contrast, the U.S. market has gone through several boom and bust cycles, and in 2021, its market cap to GDP ratio even reached as high as 200 percent, indicating the market was overheated and overvalued.
For investors, an inconvenient truth could be that the U.S. capital market is like stepping into late autumn or winter as it is now at the end of a financial cycle, and it may take a longer period to recover, while China's capital market is more like experiencing a cold spell in late spring but on course to a flourishing summer.
INFLATION WORRIES
Much of the recent talk about America's economy focuses on the possibility of stagflation. On the one hand, the U.S. economy is cooling, shrinking by 0.9 percent at an annual rate in the second quarter after a contraction of 1.6 percent in the first. On the other hand, the U.S. is struggling with towering inflation.
On July 27, the U.S. Federal Reserve raised the benchmark interest rate by three-quarters of a percentage point in its ongoing battle to tamp down raging price pressures that were squeezing American families.
It was the second straight 75-basis-point increase, and the fourth rate hike this year.
Although the U.S. latest inflation data showed prices did not rise much in July, the dominant factor in the drop was the recent fall in oil prices. Once volatile food and energy costs were stripped out, core inflation was still up by 5.9 percent from a year earlier.
Compared with the U.S., China is much more likely to see lower inflation.
In terms of economic fundamentals, China has favorable conditions to keep prices generally stable, the central bank said last week, citing the country's stable monetary policy, high food self-sufficiency rate, low linkage of domestic coal and clean energy prices with international markets, and efficient operation of industrial and supply chains.
China's consumer price index, a main gauge of inflation, rose 2.7 percent year on year in July, below the government's annual target of 3 percent. The producer price index, which measures costs for goods at the factory gate, went up 4.2 percent year on year.
However, China should not let down its guard against price increases, as the central bank also warned of structural inflationary pressures and admitted the possibility of seeing CPI exceed 3 percent in a few months.
ADAPTABILITY CONCERNS
High adaptability is a hallmark of the Chinese economy. China's exports serves as a telling example. From 2000 to 2021, among the world's top 10 container ports, the number of Chinese ports increased from one to six.
In the second quarter when Shanghai was hit hard by the Omicron variant, the Shanghai Port's logistics pressure was shared by other domestic ports, which helped guarantee a positive growth in China's foreign trade.
During the January-July period, China's foreign trade jumped 10.4 percent year on year to 23.6 trillion yuan. As the world's biggest consumer market and top producer of manufactured goods, China's role in the global economy has become increasingly irreplaceable during the epidemic.
Despite rising deglobalization and protectionism in recent years, China has never slowed its pace of opening-up, a move widely regarded as strategically relevant to the prosperity of China and the world at large.
For instance, U.S. automaker Tesla has benefited from not just being the first foreign carmaker to own 100 percent of its Chinese operations but also securing loans worth over half a billion dollars from local banks to help finance its Shanghai Gigafactory's build-out.
China has also significantly shortened its negative lists for foreign investment, allowing foreign funds bigger access to industries such as finance, energy transport, whole-car manufacturing, and etc.
Looking back to the past few years, it was a hard-won result for China to maintain steady growth amid complex situations at home and abroad.
The Chinese economy has definitely passed through the most difficult period, and is basically on an upward trajectory in the second half of 2022.
-- Ma Guangyuan (Economist)
China will continue to step up macro-economic policy support, promote opening-up and stabilize employment and prices to keep economic activity within a reasonable range, Premier Li Keqiang said on Tuesday in a teleconference with senior officials from six major economic provinces -- Guangdong, Jiangsu, Zhejiang, Shandong, Henan and Sichuan.
Noting that the economy is at a crucial juncture for stabilizing, Li called for a greater sense of urgency to consolidate the foundation for economic recovery.
"Growth momentum should pick up, not subside," the premier said.