Economist Shaun Roache outlines how China’s economy has recovered far beyond expectations

By Tian Yuan

On June 30, S&P Global Ratings released a report titled Credit Conditions Asia-Pacific: China First To Recover.

The recent introduction of 11 financial reform measures by the Office of Financial Stability and Development Committee under China’s State Council has allowed international rating agencies such as S&P Global Ratings and Fitch Ratings to enter the Chinese market and conduct more in-depth analysis of the Chinese economy.

To detail the prospects of Asia-Pacific economic growth, shine light on China’s role, and discuss other topics, China Report ASEAN conducted an exclusive interview with Shaun Roache, S&P’s Asia-Pacific senior chief economist and formerly chief economist of Singaporean sovereign wealth fund Temasek Holdings.

China Report ASEAN: The COVID-19 pandemic and the quantitative easing (QE) measures of the United States have caused great uncertainty for the global economy. Considering the situation, what are your expectations for Asia-Pacific growth?

Roache: Although the Asia-Pacific region has experienced the largest recession in more than four decades because of this pandemic, China and other major regional economies are expected to recover gradually for the rest of 2020. Since the outbreak of the epidemic, Asian countries have mostly promptly identified the challenges the disease poses for economic development and enacted policies in response. For example, Beijing’s quick response to the most recent cluster of confirmed cases in the city’s Xinfadi Agricultural Produce Wholesale Market demonstrated that China and other regional countries can successfully contain the virus quickly despite vast uncertainty, which is highly significant for the gradual reopening of Asia-Pacific economies. Therefore, S&P forecast that Asia-Pacific GDP will shrink by 1.3 percent in 2020 but grow by 6.9 percent in 2021. It also forecast China’s growth at 1.2 percent and 7.4 percent for 2020 and 2021, respectively.

Government stimulus will play a meaningful role in the first phase of Asia-Pacific economic recovery. S&P forecast China’s infrastructure investment to drive its economic growth in the latter half of 2020 to 5.5 percent. After that, when the effects of the stimulus measures gradually subside, “a handover from stimulus to consumption-driven demand will be needed to secure a self-sustaining recovery.” To achieve this goal, consumer confidence must be restored based on containment of the pandemic, more job openings, and optimistic prospects of vaccine research and development.

It is noteworthy that low-income workers in the hospitality and catering sectors are affected most by social distancing, which will worsen the income imbalance in the Asia-Pacific region. Construction of a social security network with unemployment assistance and retirement insurance during the next phase will be crucial to solving problems related to this imbalance and protecting the most vulnerable groups. S&P has noticed that the Two Sessions (annual meetings of China’s top legislature and its top political advisory body) 2020 clearly defined this as a priority of the work of the government. This evidences that the Chinese government is highly concerned with people’s livelihood, which is key to rapid economic recovery, but also crucial to long-term growth. Such policy is laying a solid foundation for the development and growth of the country’s middle class.

China Report ASEAN: How has the Asia-Pacific approach differed from the European and American approaches in combating the virus and reopening the economy?

Roache: Countries and industries in the Asia-Pacific region are at different stages of recovery in the post-pandemic period, but the region at large will remain the most dynamic region of the global economy. The region has maintained many unique advantages like stable economic fundamentals, formidable infrastructure, enlarged technical worker groups, and a large-scale sophisticated manufacturing supply chain that has emerged in just a few decades due to the above factors. These traditional advantages have not only brought to the Asia-Pacific region rapid economic growth, continuously-improved wages, and an ever-growing middle class, but also ensured that the region will continue to lead global growth.

It is even more impressive that China and other major Asian economies are gaining so much ground in high-tech fields such as semiconductors, communications infrastructure, e-commerce, and financial technology. Since the global financial crisis of 2008, economic globalization has stagnated, creating downward pressure on Asian economic growth. Even so, Asia will not lose titles of “world factory” and “innovation hub.”

China Report ASEAN: How do you think China’s timely reopening of its economy will influence the global supply chain and contribute to the restoration of the Asian economy?

Roache: China’s industry has recovered far beyond expectations. This February, some market players suspected that the novel coronavirus outbreak in China would lead to severe global supply chain disruptions because of China’s pivotal position in the global value chain. However, according to S&P estimates, less than three months after the peak of the pandemic, 95 percent of China’s large-scale companies have resumed production. It will take longer for the small and medium-sized companies to recover, but impressive progress has already been made. During this process, the Chinese government has regularly released information, especially data on new developments to provide ample clarity and comfort for companies resuming production. All these factors point to the strength of China’s supply chain and the resilience of its economy.

In addition to the recovery of the real economy, China is also leading the recovery of finance in the Asia-Pacific region. At present, low interest rates and government stimulus in the Asia-Pacific region have helped mitigate the impact of the pandemic to some extent, but weak demand has created pressure on credit conditions and led to rising risk of default, especially for issuers with weaker ratings. Credit conditions in the second half of 2020 will remain very difficult, according to Credit Conditions Asia-Pacific: China First To Recover. While signs of an economic recovery in China and some developed countries in Asia-Pacific have appeared, the report states, major emerging markets such as India are still struggling with large swaths of infection and a rising number of COVID-19 cases. Thanks mainly to government and regulatory actions, financing conditions have eased compared with late Q1 and early Q2.

S&P believes the Chinese government’s emphasis on “new infrastructure” in its latest development plans is also encouraging. This aligns with China’s vision of advancing structural reform for development driven by innovation instead of heavy industry. During this process, the public sector can play a key role in developing new industries by providing appropriate investment incentives. At the same time, we should keep in mind that the private sector is the main player in innovation-driven development. Therefore, maintaining a level playing field, especially through smooth financing channels for private sector companies, will be tremendously significant for China to continue the momentum of innovation-driven development.

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