Massive internal and external pressure has made stabilizing economic growth a top priority. China has made efforts to strengthen the supply chain and navigated a path towards economic globalization by opening wider to the world
By Zhang Tao, Zhang Lijuan, Chen Ke
Since the outbreak of COVID-19 pandemic, countries around the world have responded in different ways. Measures such as lockdowns, stimulus packages, and cash checks resulted in interruption of supply chains, suspension of work and production, inflation, and soaring prices of bulk commodities. To stabilize the economy, most of the world’s major economies entered a cycle of interest rate hikes, adding to the risk of a hard landing. At the same time, exchange rates have fluctuated sharply, which could accelerate capital flight from emerging markets, including China. In some parts of China, the resurgence of COVID-19 has resulted in many infections, complicating the situation of pandemic control. In April, Xinhua News Agency argued in an op-ed that to realize the goal of “dynamic zero COVID cases,” some parts of the country would have to push the “pause” button. Understandably, people in lockdown areas are having problems with their livelihood and production.
Chinese decision-makers have to make tough choices to address internal and external risks while seeking opportunities. The path they chose is stability.
On April 14, Chinese Premier Li Keqiang presided over a State Council executive meeting that resulted in the decision to “use monetary policy tools like reserve requirement ratio cuts at an appropriate time to increase banks’ lending capacity and strengthen financial support to virus-hit sectors, micro, small- and medium-sized enterprises and self-employed individuals.”
The next day, the People’s Bank of China reduced the reserve requirement ratio (RRR) for financial institutions by 0.25 percent. After this reduction, the weighted average ratio for financial institutions would stand at 8.1 percent, injecting a total of 530 billion yuan (roughly the equivalent of US$83 billion).
Earlier in March, Vice Premier Liu He presided over a special meeting of the State Council Commission on Financial Stability and Development. Xinhua reported that the meeting urged relevant departments to earnestly shoulder responsibilities, actively introduce market-friendly policies, and prudently introduce policies with a contractionary effect. They were instructed to respond to issues that draw attention from the market quickly. The meeting recommended that any policy with a significant impact on the capital market should be coordinated with the financial regulatory authorities in advance to maintain stable and consistent expectations, long-term momentum of healthy economic development, and stable development of the capital market.
Stabilizing the economy and expectations has become a top priority.
“The Chinese economy has maintained steady growth and contributed greatly to the world economy because the country has focused on stability by coordinating its pandemic response with economic and social development,” said Zhang Yongjun, deputy chief economist and member of the academic committee at the China Center for International Economic Exchanges.
Investment, consumption, and exports are the three major engines propelling economic growth. In the context of pandemic response, the demand for consumption is obviously weak. Zhuo Liang, chief economist of Shanghai Xinyin International Trade Company, thinks that the strict pandemic response measures in some major cities and provinces of the Chinese mainland since March have constrained consumption, exerting a direct impact on domestic demand and indirect impact on imports. In the short term, improvement of domestic demand and imports will depend on the effectiveness of relevant measures and whether authorities ease restrictions. As a result of the resurgence of the pandemic, prices of consumer goods are rising with the rising cost of raw materials and logistics. In March, China’s consumer price index (CPI) rose by 1.5 percent year on year to a record high in the first three months of this year, while the producer price index (PPI) rose by 8.3 percent year on year.
In terms of investment, a leading official from the National Development and Reform Commission (NDRC) revealed that the government planned to issue 3.65 trillion yuan (US$556.7 billion) of special-purpose bonds this year, which will provide important support for investment growth alongside the 1.2 trillion yuan (US$183.12 billion) of special-purpose bonds issued in the fourth quarter of last year. The country will actively expand investment in manufacturing and people’s livelihood, which will help to improve the conditions for private investment. It will also study and formulate policies and measures to boost private investment in new circumstances, leverage the lead role of major projects and government investment, and invigorate private investment. A State Council executive meeting at the end of March declared that China would make the most of government bonds to expand effective investment as part of efforts to reinforce weak links, enhance development momentum, and promote steady economic growth.
However, implementation of relevant policies to boost investment are subject to the financial capacity of local governments. In recent years, the impact of the pandemic and policy regulation in some industries have slowed the growth of local fiscal revenues while obligatory expenditures have increased. Taxes and fees have been cut continuously. Some local governments face increasing pressure on fiscal revenues and expenditures. Expansion of investment through bonds has limits.
Against this backdrop, exporting has become a bright spot. Li Kuiwen, spokesperson for the General Administration of Customs and head of its statistics and analysis department, announced at a March press conference that China’s foreign trade in goods reached 9.42 trillion yuan (US$1.45 trillion) in the first quarter, up 10.7 percent year on year. Reuters reported that a major driver of the economy was China’s exports in March increasing 14.7 percent year on year, achieving a trade surplus of US$47.38 billion for the month. In the coming months, exports will be a key factor for China’s steady economic growth this year.
At an online seminar co-hosted by the National Committee on US-China Relations (NCUSCR) and Peking University in March, Huang Yiping, an economist from Peking University, said that China’s current exports are particularly strong, but unsustainable, because one reason for China’s strong exports was its ability to bring COVID-19 under control relatively fast compared to other countries. “We have produced some goods for other countries while they were locked down,” he said. “When the pandemic situation gets entirely under control, the extra stimulus from export growth will likely gradually ease and disappear.”
The worsening pandemic situation in Shanghai and some other cities in March caused local governments to adopt more rigid control measures, which has had an impact on the supply chain. Huang’s export forecast may arrive earlier than expected.
Protecting the Industrial Chain
China’s exports have grown rapidly since the country acceded to the WTO in 2001. According to the World Bank statistics, China’s exports of goods and services reached US$2.7 trillion in 2020.
China’s integration into the world industrial chain has had an important impact on the country and the global economy. Yi Xiaozhun, former deputy secretary-general of the WTO, told Shanghai Securities News that the main factors driving China’s rapid industry upgrade over just 20 years are its accession to the WTO, embrace of globalization, and active integration into the global value chain. The World Bank said that from 1990 to 2015, China upgraded from a primary manufacturing provider to an advanced manufacturing and services provider. It also joined the ranks of the United States, Japan, and Germany as a network center of the global value chain.
From a global perspective, alongside providing rich products for consumers in various countries and promoting more optimal allocation of production factors, China has provided an important guarantee for the stability of the virus-hit global supply chain over the last two years. Xing Ziqiang, chief economist with Morgan Stanley China, published an article in 2021 predicting that China’s position in the global industrial chain would likely rise as “the first to pass the global stress test of COVID-19,” and become a safe harbor of the global supply chain.
The formation of the supply chain is the result of the long-term development of international trade and investment. The more clear and detailed the division of labor at each node of the chain, the more professional and centralized the production and supply of a single node will be. A “breaking point” can cause the entire chain to be inefficient or paralyzed. In the context of globalization, the international division of labor and trade cooperation are closely related to not only the global economy, but also the normal operation of social life.
With the spread of the Omicron variant in China this year, the “safe harbor” began to reach a potential breaking point.
Since the beginning of April, the virus has spread rapidly in Shanghai. The city entered “static management” to meet pandemic control requirements. Shanghai has a pivotal role in the global industrial chain as one of the largest manufacturing centers in China with a heavy concentration of automotive and electronics suppliers. It is home to the largest container port in the world and a major airport serving inbound and outbound air cargo. Exports produced in Shanghai account for 7.2 percent of China’s total volume, and about 20 percent of China’s export container throughput moves through its port, according to a report from Spanish financial institution BBVA.
The pandemic and response measures have impacted domestic and foreign industrial chains. On April 15, Yu Chengdong, CEO of Huawei’s Consumer Business Group and Intelligent Automotive Solution BU, warned on WeChat that if Shanghai could not resume work and production, all technology and industrial entities that rely on Shanghai’s supply chain would be completely shut down by May, especially the auto industry. At the beginning of April, NIO issued a statement saying that since March, its supply chain partners in Jilin, Shanghai, Jiangsu, and many other locations had suspended production because of the pandemic outbreak and had yet to resume. Because of that, it suspended production. Chip and semiconductor industries in Shanghai and the Yangtze River Delta have also made calls for help.
In terms of foreign trade, Sky News (UK) reported that despite the current “closed-loop management” of the Shanghai Port, transportation of containers in and out of the terminal has still been restricted. The media quoted a source from a supply chain research agency saying that some cargo goods moving from China to major European ports such as Hamburg and Rotterdam had been delayed by roughly 10-12 days.
According to a post from the FreightWaves website, export containers that were already at the Shanghai Port when the lockdown started are making it onto vessels, but most goods booked for outbound vessels have been stranded in warehouses because shuttle trucks can’t make pickups or deliveries. Truckers require special permits which are only good for 24 hours as well as negative COVID tests to get in and out of the city or enter certain zones. Checking COVID certificates has led to huge traffic jams at the port. A French logistics provider reported that truck drivers in the Shanghai area are being forced to wait up to 40 hours at certain highway entrances. Trucking rates have soared because of the limited supply, and shippers are waiting three to five days for cargo to get picked up.
The European Chamber of Commerce in China, which represents the interests of EU companies, informed the Chinese government in April that a flash survey conducted by the German Chamber of Commerce in China showed that in the previous week, 51 percent of German companies’ logistics and warehousing and 46 percent of German companies’ supply chains had been completely disrupted or severely impacted by the current COVID-19 situation in China. On April 15, Japanese Consul General in Shanghai Shuichi Akamatsu posted a letter to Zong Ming, deputy mayor of Shanghai and deputy head of the city’s leading group for pandemic prevention and control, on the consul’s website urging him to address concerns of Japanese businesses over losses and other disruptions caused by lockdowns.
Protecting the supply chain is an urgent task. On April 16, the Shanghai Commission of Economy and Information Technology released Guidelines for the Prevention and Control of COVID-19 Pandemic for Industrial Enterprises Resuming Work and Production in Shanghai (First Edition), announcing the first “white list” of 666 key enterprises to resume work and production.
On April 18, a national teleconference on ensuring unimpeded logistics and promoting the stability of the industrial chain and supply chain was held in Beijing. The conference clarified requirements on efforts to ensure people’s livelihood, unimpeded logistics, and industrial circulation. It also called for improving the working and living conditions of logistics workers and providing financial support such as deferred loan repayment. National unified passes were to be issued to all truck drivers on the road. Nucleic acid test results were to be valid for 48 hours throughout the country. The tests were to be conducted within closed loops. Truck drivers were to be released before the test results came back. The prominent problems in key areas were addressed one by one. It also outlined efforts to stabilize the industrial chain and supply chain. Stimulus of 200 billion yuan (US$30 billion) for scientific and technological innovation and 100 billion yuan (US$15 billion) for transportation and logistics was expected to play a catalytic role in attracting investment of 1 trillion yuan (US$150 billion) and establishing a white list of key industries and foreign trade enterprises such as automobiles, integrated circuits, consumer electronics, equipment manufacturing, agricultural materials, food and medicine.
Signs of recovery have emerged. Shanghai Securities News reported that SAIC Motor started stress-testing its production resumption plans on April 18, and Tesla’s Shanghai Gigafactory resumed work on April 19. Shanghai’s auto industry is gradually resuming work and production.
Economic Daily reported that the Shanghai International Port (Group) Co., Ltd. (SIPG) is trying to optimize its mode of operation to ensure the timely arrival and departure of containers. The company offered all sectors of society the option of waterway transport of containers to replace road transport (“road to water”). The new option has provided customers with efficient and convenient water transportation services to meet their needs. Scope of services covers terminals in the Shanghai area and relevant ports in the Yangtze River and Yangtze River Delta region. Among SIPG “road to water” services are those provided by SIPG Logistics Company, which has integrated resources of terminals and waterways along the Yangtze River to provide solutions for customers along the Yangtze River and in northern Zhejiang Province seeking to transport containers to Shanghai Port by water.
Promoting Globalization with Wider Opening
Stabilizing the supply chain is key to ensuring domestic production and exports. However, the longer-term threat to exports is a potential backlash against globalization. Statistics show that in the past decade, China’s contribution to world economic growth has stayed around 30 percent. Even in the last two years amid the pandemic, the Chinese economy has grown at an average of 5.1 percent, a leading position among the world’s major economies, as the engine of world economic growth.
In 2021, China’s GDP was 114.4 trillion yuan (US$22 trillion), an increase of 8.1 percent over the previous year. China’s contribution to world economic growth was around 25 percent, making it an important force driving global economic recovery.
Since its accession to the WTO, China has been one of the biggest beneficiaries of economic globalization. It has grown into the world’s second largest economy. However, globalization itself has been under attack recently.
When the global industrial chain created conditions for resource allocation, traditional industries in the United States and some developed countries in Europe were affected. Since the 1970s, they have been successively challenged by Japanese and Chinese industries. Dissatisfaction with globalization, especially “unfair” trade with China, became one of the main forces behind Donald Trump’s success in the U.S. presidential election. Deng Ziliang, researcher with the National Academy of Development and Strategy and professor at the School of Business of Renmin University of China, told Xinhua last year that since the 2008 global financial crisis, developed countries represented by the United States had become committed to bringing the manufacturing sector back home and creating a favorable environment for boosting manufacturing exports with protectionist means.
Under the banner of “Made in America,” the Trump administration imposed trade sanctions on China, the EU, and other major trading partners. It also continuously criticized the WTO, a representative institution of trade globalization. In December 2019, it blocked the selection process for new Appellate Body Members, which paralyzed the institution’s dispute settlement system. Since taking office, the Biden administration has been softer in attitude, but it has not lifted some of Trump’s trade sanctions against China. High-level officials have denied the policy of “decoupling,” but the punitive tariffs remain in force. And the U.S. government has not yet cancelled the restrictions on the selection of the WTO’s Appellate Body, claiming that the United States “continues to be systematically concerned about the way the body operates.”
When economic globalization encounters headwinds, China’s attitude becomes even more important for the future of globalization.
“Building an open world economy will enable more countries to participate in the international division of labor and exchange,” commented Xu Xiujun, director of international political economics at the Institute of World Economics and Politics under the Chinese Academy of Social Sciences. “The complementarity will promote effective allocation of resources between countries and regions, improve labor productivity, and create impetus for economic development.” An open world economy has three distinct features: an open concept of economic development, an open institutional environment, and open material conditions such as sound infrastructure and logistics, Xu said.
In recent years, China has introduced a series of policies to open further including liberalization of market access, continuous reduction of its negative list for foreign investment, establishment of 21 pilot free trade zones, construction of the Hainan Free Trade Port, four successful China International Import Expos (CIIE), official implementation of the RCEP agreement, and promotion of high-quality Belt and Road cooperation.
In terms of the continuous reduction of the negative list for foreign investment, over the last two years during the pandemic, nine items were removed from the Special Administrative Measures (Negative List) for Foreign Investment Access and 10 items were removed from the Special Administrative Measures (Negative List) for Foreign Investment Access in Pilot Free Trade Zones. “Today, the foreign share in the auto manufacturing sector has been fully liberalized,” declared Liu Rihong, director general of the First Department of General Research at the State Council Research Office. “Manufacturing entry in the pilot free trade zone has been cleared, which was a very strong opening-up initiative.”
In his speech at the Davos Forum at the beginning of this year, President Xi Jinping said that China would continue to expand high-standard opening-up, steadily advance institutional opening-up in rules, management, and standards, deliver national treatment for foreign businesses, and promote high-quality Belt and Road cooperation. With the entry into force of the RCEP agreement on January 1 this year, China will faithfully fulfill its obligations and deepen economic and trade ties with other RCEP parties. China will also continue to work to join the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) and the Digital Economy Partnership Agreement (DEPA) to further integrate into the regional and global economy.
“Economic globalization is the trend of the times,” said Xi, “Though countercurrents are sure to exist in a river, none could stop it from flowing to the sea. Driving forces bolster the river’s momentum, and resistance can even enhance its flow. Despite the countercurrents and dangerous shoals along the way, economic globalization has never and will not veer off course. Countries around the world should uphold true multilateralism. We should remove barriers, not erect walls. We should open up, not close off. We should seek integration, not decoupling. This is the way to build an open world economy.”