What makes the world's second largest economy tick
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Background explainers, news and analysis on China’s economy, including its opening up, the US-China trade war, the impact of tariffs and trade talks, growth rates and other key economic data, the Belt and Road Initiative, and Greater Bay Area plan.
The liberalisation of China’s capital account is an acutely sensitive issue for Beijing, mainly because of the Communist Party’s innate desire for control. The global policy landscape has changed sharply in the past decades, and there is plenty of evidence that free capital mobility exacerbates financial crises.
China’s growth in 2020 was driven by fixed-asset investment and exports. This is not ideal. To achieve higher growth in 2021, China needs a larger increase in infrastructure investment, and the government may have to issue more bonds than planned.
China can do more to polish its appeal as a home for global tech talent, but must ultimately rely on its own, which it has in abundance. The obstacle lies in persuading them that China’s restrictive environment offers them the best opportunities for creative growth.
Our global response would be more effective if world policymakers could work in closer harmony. Trade disputes must be settled, inflation fears set aside and monetary policies harmonised to ensure mutually assured recovery for all.
The IMF has noted a brightening in the global economy’s prospects, but the inequalities that characterise the post-pandemic recovery pose significant risks. While financial markets no longer attach importance to countries’ ability to contain the virus, the handling of the pandemic is a crucial determinant of economic performance and has major political consequences
Falling company earnings expectation, a credit crunch, geopolitical tensions and pressure from rising US bond yields are a few factors. Beijing will want to address the volatility but investors should be aware that the A-share market remains complex.
Economies that have failed to control the virus so far might be able to compensate with successful vaccination programmes. Those who can catch up at this part of the race against Covid-19 can still emerge from the pandemic stronger.
Beijing has ample scope to achieve 6 per cent growth in the coming years, but Germany, dependent on trade with its European Union partners, has poorer prospects. Germany could take its cue from China’s new gambit to turn inwards and focus on domestic-led recovery to thrive.
The magnitude of monetary easing looks modest compared with previous cycles, with inflation an unlikely risk and growth taking the weight off debt leverage. Moving aggressively would destabilise jobs and SMEs – though this is still a possibility if economic recovery comes faster than expected.