Dr Henny Sender is Managing Director of BlackRock in Hong Kong and Senior Advisor to the BlackRock Investment Institute.
In mid-January last year, as many Chinese finished their travel plans for the Lunar New Year holiday, rumors of a mysterious new disease in the central city of Wuhan began to circulate online.
Yet when news on January 25 broke that the entire city of 11 million people would be locked out, there was widespread shock. Suddenly, the celebrations that typically involve half the country crowding trains and buses as they return home for family reunions, parties and fireworks, have been suspended.
It is not only in Wuhan that the activity has stopped. People across the continent were reluctant to venture outside; they exchanged red packets of money and practically bought them instead. Online sales of everything from mahjong tiles to treadmills have exploded. At the end of the first quarter of 2020, the economy shrank 6.8% from the level of the first quarter of 2019 in real terms.
Yet a year later, in mid-February, as the Year of the Rat finally came to an end, China emerged from the COVID pandemic relatively unscathed. Last December, for example, fast food restaurant McDonald’s had a better month than the last month of 2019, just before the virus hit.
In other words, the economy is healing. It is the only large economy in the world to have positive growth for 2020, at 2.3%. Indeed, with gross domestic product up 6.5% in the last quarter, the continent has returned to its pre-COVID trajectory. Only Taiwan and Vietnam can boast the same.
A second wave, which reappeared in parts of northern China in January, was held back by measures that proved to be effective last year, including mass testing and restrictions on travel.
This means Beijing can now turn its attention away from the immediate challenge of COVID. In the past, the focus has generally been on maximizing growth. But today the policy is more about improving the quality of growth. Going forward, this means that growth will be less credit-driven and that the potential financial risks associated with corporate and household debt distress will be reduced.
The emphasis on deleveraging contrasts sharply with official policy in the rest of the developed world. Today, most developed countries rely on a combination of fiscal and monetary policies marked by purchases of financial assets and zero interest rates, thus encouraging both risk-taking in financial markets and asset bubbles.
This focus on the quality of growth has been strengthening in recent years. For example, between 2012 and 2016, debt growth as a share of GDP increased by more than 8 percentage points. But in 2017, Beijing sharply reduced that number to just over a percentage point, particularly by quelling the thirst for borrowing from local governments, according to data from Helen Qiao, who heads Asian economic research for Bank of America. This control, however, was relaxed to deal with the pandemic last year, resulting in an increase in debt to GDP of over 300% of GDP.
But today, Beijing wasted no time in reintroducing restrictions on borrowing. The tightening particularly targets real estate developers, with their voracious appetite for debt, to reduce debt and slow rising house prices, especially in first-tier cities, according to President Xi’s edict Jinping that the houses speculation.
The government is also determined to face up to the legacy of its past insistence on a growth model that emphasized manufacturing for export, a model that has left its skies yellow and rivers polluted.
Commitment to cleaning up the environment doesn’t have to mean slower growth, however. For example, other countries that have made similar commitments to carbon neutrality in the coming decades will have to look to China for vital inputs such as solar panels as they shift from coal to power. solar. In addition, in the future, China’s commitment to technology, including everything from renewables to robotics, e-commerce to electric vehicles, will increase its competitiveness, especially because there is less existing infrastructure.
Certainly, the celebration of the Year of the Ox will be far more subdued than in 2019, before anyone has ever heard of COVID. According to data from TS Lombard, vacation travel to the country is expected to fall by 70% from last year’s depressed level. The urban middle classes are likely to experience slower wage growth than migrant workers on city assembly lines, which will narrow what had been a growing income gap.
Meanwhile, in early January, unusually cold weather and snow temporarily disrupted construction and manufacturing projects, just as COVID began to disrupt travel again.
Snow is a nice problem to have these days. And the Lunar New Year, after all, is all about looking forward to spring despite the temporary disruptions of winter.
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