Opinion

Depression, and not stagflation, could haunt China in 2020

This opinion piece was originally published in Asia Times and Medium China’s GDP in the first quarter of the year has surprised nobody but the devil is in the details. Local retail sales continued to fall in March (-16%), marginally better than during the peak of the Covid19 outbreak in January and February. The continuation […]

By: Date: April 17, 2020 Topic: Global Economics & Governance

China’s GDP in the first quarter of the year has surprised nobody but the devil is in the details. Local retail sales continued to fall in March (-16%), marginally better than during the peak of the Covid19 outbreak in January and February. The continuation of the slump in domestic demand clearly stands out when compared with the return to production in March.  In fact, industrial production hardly declined in March (1.1%) after a collapse in January-February. More importantly, the vanishing demand cannot be explained by external factors only. In fact, export growth in March was negative (-12.5%) but less than that domestic retail sales.

At first sight, one could imagine that the reason for such poor domestic demand is panic saving but labour market data offers a much gloomier picture with higher unemployment and collapsing disposable income (-12.5% in real terms in the first quarter). One important consequence of the collapse in demand versus a rather resilient supply is growing deflationary pressures in the Chinese economy. In fact CPI inflation has clearly decelerated and producer prices are already in negative territory, even after the shut-down of factories for a couple of months. Against the backdrop, China clearly has more room for monetary stimulus but the question is whether monetary tools can push people to consume, which is what is needed.  On the fiscal side, China has eased value added taxes and temporarily waived social security contributions but it remains unclear how these measures may help increase disposable income, all the more, push households to consume. There have been some action on consumption vouchers by some provinces but they have not been generalized yet. Furthermore, the collapse in retail sales is so widespread that the Chinese government may have to start thinking about putting money directly into households’ pockets, in the form of helicopter money or perhaps more targeted measures, given the size of China’s population and the very uneven income distribution.

Moving forward, the worst of the coronavirus contagion might have already past in China, but the economy will still be under pressure as regards how to resume consumption demand for which positive growth in disposable income will clearly be needed. Besides, two more challenges come to mind: plummeting external demand and deflationary pressures, which are obviously interrelated. Covid19 seems to have pushed China back in its efforts to rebalance its economy towards a consumption-based growth model. This will be even harder if the government decides to jump on what it has long been able to deliver fastest, namely an infrastructure-led stimulus. Under the hypothesis that the world will continue to be locked down, or close to that, for the remaining of the second quarter at least, the risk of China’s going back to an investment-led growth model is high, with short-term winners on the commodity space but with long-term losers globally. A more unbalanced growth model, fed by ballooning debt, does not serve China well, nor the rest of the world.


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Opinion

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Opinion

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China's targeted corporate shopping spree to continue, especially in Europe

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By: Alicia García-Herrero and Jianwei Xu Topic: Global Economics & Governance Date: July 17, 2020
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When G20 finance heads meet on 18 July, Europe will again need to lead on the group’s flagship COVID-19 initiative to postpone low-income countries’ debt service payments. For the first time, China has agreed to participate as an official creditor alongside members of the Paris Club. However, continuing lack of clarity on which Chinese creditors will participate, coupled with resistance from private sector creditors to voluntary participation, suggest that actual relief will be much less than originally planned.

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Loan guarantees have been a major part of the COVID-19 support packages offered by European governments to companies. The actual take-up numbers so far follow very different patterns from the headline announcements, and might allay early concerns about single market distortions caused by the different sizes of packages in different countries.

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Opinion

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Emerging economies are fighting COVID-19 and the economic sudden stop imposed by the containment and lockdown policies, in the same way as advanced economies. However, emerging markets also face large and rapid capital outflows as a result of the pandemic. This column argues that credible emerging market central banks could rely on purchases of local currency government bonds to support the needed health and welfare expenditures and fiscal stimulus. In countries with flexible exchange rate regimes and well-anchored inflation expectations, such quantitative easing would help ease financial conditions, while minimising the risks of large depreciations and spiralling inflation.

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EU recovery plans should fund the COVID-19 battles to come; not be used to nurse old wounds

In its proposed Recovery Fund, the European Commission uses allocation criteria mainly linked to infection rates and past economic performance. To foster an efficient economic rebound post COVID-19 crisis, we propose instead to allocate funds through a forward-looking approach based on specific industrial and economic structure of EU regions.

By: Carlo Altomonte, Andrea Coali and Gianmarco Ottaviano Topic: European Macroeconomics & Governance Date: July 6, 2020
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Europe’s China problem: investment screening and state aid

China’s state capitalist economy poses a challenge to EU openness to foreign investment. In response, the European Commission 17 June published a White Paper on “levelling the playing field with regard to state aid”, contemplating sensible and balanced policies to protect the integrity of the European single market from subsidised foreign acquisitions. However, against the backdrop of collapsing global capital flows and limited existing FDI from China, there is little risk of excessive exposure, indeed a deepening of bilateral investment flows would be beneficial for both economies.

By: Marta Domínguez-Jiménez and Niclas Poitiers Topic: Global Economics & Governance Date: July 2, 2020
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By: The Sound of Economics Topic: European Macroeconomics & Governance Date: June 25, 2020
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The two narratives briefly examined here cast light on different aspects of the EU in the times of Covid-19. Euroskeptic nationalists typically propagate claims of EU failure but have been rather subdued during the pandemic as mainstream governments have taken over their trademark policy of closing borders to foreigners. Nonetheless, the grip on power of several pro-EU mainstream leaders, including President Emmanuel Macron in France, Prime Minister Conte in Italy and Prime Minister Pedro Sanchez in Spain, remains tenuous.

By: Michael Leigh Topic: European Macroeconomics & Governance Date: June 23, 2020
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