Zhu Guangyao: Overcoming the World’s Uncertainty with the Great Resilience of the Chinese Economy
In 2020, the COVID-19 pandemic has had a serious impact on the world's political and economic order, and has changed the way of life and production for people around the globe. The 75th Anniversary of the United Nations was held in recent days, and as the first video conference since the establishment of the United Nations, it reflects the serious challenges faced by the global community. António Guterres, the UN Secretary-General, said in his speech that the world is heading in a dangerous direction, and now faces its own “1945 moment” when the countries of the UN must work together to counter the severe threats facing the globe. In response, China must unswervingly follow President Xi Jinping's directives to find new opportunities in the midst of crises, and open new chapters in response to change. To successfully carry out these instructions, we must make careful observations and deepen our understanding of the great changes occurring around the globe. The world today is facing the following six major uncertainties:
1. The uncertainty of COVID-19’s development and its impact on the world economy
So far, the global spread of COVID-19 has resulted in more than 30 million infections and over 980,000 deaths. The global economy has fallen into a deep depression and the international economic governance system has been severely impacted. The International Monetary Fund predicts that global economic growth in 2020 will be -4.9%, indicating the most severe recession since the IMF’s founding. In response, some countries have adopted various measures to stabilize their economies and prevent the threat of another Great Depression (1929-1933). However, due to insufficient scientific judgment and inadequate pandemic responses in many countries, the results have not been as positive as originally predicted. Schools hurriedly reopened in the US, leading to a consistently rising number of infections. Meanwhile, a second wave of COVID-19 is sweeping through Europe.
While the growth of the world economy this year may exceed -4.9%, I do not think that it will reach the IMF’s predicted growth of 5.4% in 2021, as this estimate is based on the premise that the pandemic will be effectively controlled in the second half of 2020. At present, this goal is out of reach. The world economy’s deep recession has had a serious impact on the living standards of people all over the globe, and has created substantial barriers to achieving the 2030 UN Sustainable Development Goals. Such is the stark economic reality that we are now facing.
2. The uncertainty of the global industrial chain and supply chain
The global industrial chain and supply chain were formed after the Second World War, when the world was in a relatively peaceful state. They were built through the long-term cooperation of international companies, with comparative advantage as their premise and profit as their goal. The chains took shape according to countries’ resource endowments, labor quality, and potential consumer markets. However, the stability of the industrial chain and supply chain have been challenged by COVID-19. On one hand, economic globalization is irreversible. On the other hand, we must objectively recognize the following changes in the global industrial chain and supply chain as a result of COVID-19.
The first is safety, which to some extent exceeds efficiency. The temporary isolation of different links in the lengthy industrial chain during COVID-19 has had a significant impact on numerous countries. As the main body of the supply chain for a certain product is adjusted, we must pay special attention to the impact on small and medium-sized enterprises, which often act as the suppliers of various parts used to build the main product.
The second is policy, especially with regard to medical supplies and pharmaceutical products. Many Western countries are now requiring these industries to return home. In response, we must observe what will happen and study relevant policy impacts. For example, the United States is using tax incentives and Japan is providing direct financial support to facilitate the domestic relocation of their enterprises. This economic effort and its policy requirements will have an impact on the layout of the global industrial chain and supply chain, especially in the pharmaceutical industry.
Third, we must also recognize that the digital economy has developed beyond previous expectations under the impact of COVID-19. Online teaching, telemedicine, teleworking, and the convenience provided by the digital economy have largely offset the impact of the pandemic. We must further research the development of the digital economy to gain a more comprehensive understanding of these changes.
Finally, the relative convenience of communication and transportation on a regional scale under the impact of the pandemic has generated a new impetus for regional economic cooperation. We sincerely hope that the Regional Comprehensive Economic Partnership (RCEP) will be signed before the end of this year, and we also look forward to the signing of the China-EU Investment Agreement during the same time frame. These agreements demonstrate major progress in promoting regional economic cooperation.
3. The uncertainty of the financial market
Since the outbreak of COVID-19, the US Federal Reserve has adopted extreme policy measures to maintain market stability. This is especially evident in the Fed’s decision to suddenly reduce the US federal interest rate by 0.75% on March 3, and again to zero on March 15. As of September 20, the Fed’s balance sheet was 7.09 trillion US dollars, which is nearly double the value on the same day one year ago—3.85 trillion US dollars. We must pay close attention to this considerable expansion of the Fed's balance sheet, as well as other recent changes.
For example, beginning on June 10, the Federal Reserve relatively reduced the money supply. However, it began to increase bond purchases in August. On March 17, the Fed also announced that it would expand its existing dollar liquidity swap line mechanism from its original agreement with four other central banks into an agreement with a total of 14 other central banks. This expansion will certainly affect the liquidity of the US dollar and have a major impact on the world capital market. We must keep a close eye on its ramifications.
At the same time, the Federal Reserve recently announced that its interest rate policy will remain unchanged through the end of 2023. In other words, the United States will continue to maintain interest rates near zero until the end of 2023. This is a significant development, as the European Central Bank currently has a negative interest rate of 0.5% and the Central Bank of Japan has a negative interest rate of 0.1%. If the United States does not change its zero-interest-rate policy before the end of 2023, it will encourage the persistence of this global negative-interest-rate trend.
At present, there are 17 trillion US dollars in bonds around the world that have negative interest rates as the base rate. The 10-year US Treasury bond, after adjustments for inflation, is now at -0.69%. What impact will the global trend of negative interest rates have on China? China maintains a prudent monetary policy and leaves sufficient policy space for adjustments, which will stabilize the medium- and long-term development of the Chinese economy. At the same time, we should investigate the impact of a long-term interest rate differential of about 2% between the RMB and international currencies to discern the impact this would have on our financing costs and interest rate trends.
4. The uncertainty of the development of the digital economy
The development of the digital economy has accelerated to help us deal with the impact of COVID-19, leading us into an uncertain future. The digital economy is gaining ground as a new form of economy, with data at its center. This is a boon for China, which is home to the world’s most effective logistics due to its convenient transportation infrastructure, the world’s largest information flow as a result of its extensive communication base station infrastructure, and an abundant data flow generated by the world’s most widely-used electronic payment system. Logistics, information flow, and data flow are the most precious elements of the digital economy. Thus, China has made considerable progress in establishing the hardware necessary to nourish the digital economy and has a comparative advantage in this regard. Now, China must focus on building a macro policy framework to facilitate the digital economy, which will have a long-term, decisive impact on the development of this new economy. This entails policy in the following areas:
1) Data security and data privacy. China has appealed to its peers around the world to establish an initiative on digital security, which will require extensive international cooperation. At present, only the EU has successfully drafted and implemented legal provisions for data security and privacy protection—the General Data Protection Regulation (GDPR). On September 14, the leaders of China, Germany, and the EU held the China-EU Summit and reached many important agreements. The strengthening of China-EU cooperation in the digital economy is of great historical significance, and we will continue to work with the European Union and other countries around the world to improve data security and data privacy protection. It is in the best interests of both China and the global community as a whole to continue making advancements in these fields, building off the foundation of the China-EU summit.
2) Digital taxation. The digital economy today requires a corresponding digital taxation system, both on a domestic and international scale. This will require many efforts and reforms by government leaders at multiple levels around the world. Under the authorization of the G20, the Organization for Economic Cooperation and Development (OECD) has been tasked with formulating policies related to digital taxation, which has been deemed the most important topic under the larger category of tax base erosion and profit shifting. Although the efforts of China and other G20 countries have been able to make some progress on this front, it is regrettable that negotiations between the United States and the European Union on levying digital taxes on international high-tech companies in the EU region have failed, leading to the breakdown of international taxation cooperation. In addition to participating in multilateral efforts, China must also explore new policies regarding domestic taxation in the digital economy, which is also of great importance.
3) Digital currency. Digital currency is currently receiving significant attention in the policy world. In fact, the People's Bank of China is preparing to issue a digital currency in the form of M0, serving as a supplement to digital cash. We must conduct further research on digital currency from the broadest perspective, inclusive of all legal currencies, but excluding solely digital currencies like Bitcoin and Libra, which are not legal tender.
4) Structural issues of the digital economy. The countries of the world must come together to remedy the structural inadequacies of the digital economy, especially with regard to the monopolies of large digital enterprises.
The digital economy is a new form of economy which has come to play a key role in supporting the development of the world economy. As such, we must address its related policy issues and difficulties. In his recent speech, UN Secretary-General Guterres agreed that the digital economy is a major challenge that demands global attention and cooperation.
5. The uncertainty of climate change
In his speech at the UN General Assembly, President Xi Jinping made a solemn commitment to work toward peaking China’s carbon dioxide emissions by 2030 and achieving carbon neutrality by 2060. This demonstrates the Chinese government's responsibility to both Chinese people and people around the world. COVID-19 has shown us that tragedies like pandemics and natural disasters know no borders, and must be fought against through global cooperation. The harm of climate change is becoming increasingly apparent, and the failure of mankind to respond to climate change will lead to disasters even more serious than COVID-19. Therefore, the massive uncertainties surrounding the issue of climate change require vigilance and close cooperation from countries around the world, including the United States.
6. The uncertainty of geopolitics
Unfortunately, the world today is facing massive geopolitical challenges. In the face of COVID-19, the political coordination of major countries has remained sluggish even during this most dire of times. Additionally, the Sino-US relationship is at its worst since the establishment of diplomatic relations between the two countries. What can we do? We must rely on the wisdom and efforts of all countries around the world in accordance with the mission of the UN and a global desire for peaceful development. Through policy communication and coordination, we can work to heal multilateral relationships and restore mutual trust, stability, peace, and development.
Finally, China must unswervingly follow President Xi Jinping's directives to find new opportunities in the midst of crises and open new chapters in response to change. We must focus on China’s domestic affairs, promote further reform and opening up, and continue to improve our country’s business environment. In this way, China’s economic development can both benefit the Chinese people and contribute to peace and development around the globe.
