Premier Li Qiang has surprisingly revealed the economic data for 2023 at the World Economic Forum in Davos. The second-largest economy grew by “around 5.2 percent” in 2023, Li said in his keynote speech. China had thus exceeded its growth target set in the spring. Above all, it was well above the three percent of 2022. Li used the rest of his speaking time to campaign for more investment and more confidence in China, as Marcel Grzanna reports. He promised foreign companies that the important middle-class target group would continue to grow, as well as several regulatory relaxations.
Nevertheless, skepticism is likely to be quite high. Foreign companies have been waiting too long for Beijing to fulfill its announcements, for example, regarding public contracts. They will not be convinced unless something changes.
Li also used his presence in Davos for a meeting with top Wall Street decision-makers – including Jamie Dimon, head of JP Morgan. After the lunch, which was also attended by China’s new central bank governor, Pan Gongsheng, Dimon told Reuters: “I’m glad that people are all talking.” After all, such meetings are why so many big names from business and politics make the trip to Davos every year.
Meanwhile, Foreign Minister Wang Yi is currently traveling through several African countries. Although Kenya is not among them, we are looking at the country trying to cooperate with the West and China. Kenya is struggling under the debts that a train line between Nairobi and Mombasa, planned years ago as a flagship project, has left it with, writes Fabian Peltsch.
As things stand today, this railway is too expensive and not economical enough. Due to a lack of prospects, China no longer wants to give the country more money for the project. However, Kenya’s President Ruto needs more infrastructure – and is now looking to the West in his search for investors.
Premier Li Qiang used his special speech at the World Economic Forum in Davos on Tuesday to unveil Chinese economic data in advance. Li revealed to the audience that the second-largest economy grew by “around 5.2 percent” in 2023. Usually, the National Bureau of Statistics announces the data first. The publication is scheduled for Wednesday.
Such a breach of protocol is truly rare in China. But the end justifies the means. Li used the figure to drum up interest in more cooperation with and more foreign investment in the People’s Republic on the big stage. His country’s economy has recovered and grew faster than expected last year, Li beckoned. “Just as a healthy person often has a strong immune system, the Chinese economy can handle ups and downs in its performance.”
After a weak 2022, China has indeed regained significant economic strength. However, Li is probably well aware that lifting the Covid restrictions in his country has by no means eradicated the roots of the problem. Consequently, he has painted a rosy outlook for domestic consumption. Consumption is supposed to be China’s future growth driver. However, it is currently probably the biggest economic vulnerability.
He promised the country’s middle-income population would double to 800 million over the next ten years. The high-tech sector, green energy, and 300 million additional migrants – supposedly in the starting blocks to move to the cities and further increase the demand for housing there – are the driving forces behind rising incomes and, subsequently, thriving domestic consumption. It is a message to foreign companies, many of which produce consumer goods for the Chinese middle class.
Indeed, for many years, such promises were enough for Beijing to generate enthusiasm for China as a business hub. However, the policies of recent years have tarnished the country’s credibility: threats against Taiwan, power games with neighbors in the South China Sea, human rights violations in Xinjiang and Tibet and Hong Kong’s unlawful de-democratization.
This is why Li used lofty words right at the beginning to call for more confidence in his country. Because that is what investors and developed countries are losing. Certainly not only because companies and chambers complain about the politicization of the business environment – but also because foreign companies are still not equally treated, despite promises.
For example, Li said that policies for public tenders will be reformed. Foreign bidders are usually barred from the outset. The opening up of China’s market has been a main demand, for example, from the EU Chamber of Commerce. The flow of cross-border data will also be simplified. In November, Beijing presented a draft to ease the strict rules for international data transfer. Since then, companies have been pushing for rapid implementation. “The traditional Chinese culture very much values credibility. China is a country that attaches great importance to commitments and honors its words with concrete actions,” Li said.
But who will still take such promises from the Chinese government at face value in 2024 and build their business strategy on them? The West’s de-risking has long since begun. In this context, Li complained about a massive increase in the isolation towards his country. He even had a figure: 5,400 measures compared to less than 3,000 before the pandemic.
In Doris Fischer’s view, the US Chip Act, for example, which largely prevents China from obtaining high-end chips from the United States, is “painful.” However, Fischer also sees such targeted measures as an “incentive.” She predicts: “In addition to evasion strategies, efforts in corresponding research and development in China will continue to increase, both in an orchestrated form by the government and on the part of companies,” Fischer told Table.Media.
However, EU Commission President Ursula von der Leyen, who spoke immediately after Li, immediately reminded the Premier of China’s own protectionism. As an example, she cited the fact that the People’s Republic introduced export controls on the crucial technology raw materials gallium and germanium last October. The problems must be clearly addressed, said von der Leyen.
Li gave the world a handful of suggestions on how to restore mutual trust. More cooperation, more communication, more exchange: But this is nothing that has not been mentioned countless times.
Between the lines, Li’s proposals were clearly aimed at not denying China access to foreign technologies and giving the voices of the emerging economies, including the People’s Republic, a greater say. For example, in artificial intelligence, Li spoke in favor of an international regulatory framework and the introduction of red, ethical lines for the development of AI technologies.
However, he firmly insisted that these rules should not just be set by “a few countries” – but that all nations should be involved in their development. But the willingness of the Americans or Europeans to cooperate certainly also depends on Chinese concessions. Contribution: Felix Lee
China’s Foreign Minister Wang Yi is currently back in Africa. And even though he is not visiting Kenya this time, China’s influence can be felt everywhere in the country. For example, traveling on the railway line from Mombasa to Nairobi, financed by bank loans from the People’s Republic, is a very Chinese experience. Making the journey on decommissioned Chinese trains with tickets and staff uniforms almost identical to those in the People’s Republic. There are even the typical hot water dispensers between the compartments. However, they are not turned on. Unlike the Chinese, Kenyans apparently have no need to brew instant noodles on long train journeys.
Commissioned in 2017, the Standard Gauge Railway (SGR) from Kenya’s inland to Mombasa on the coast is the country’s most expensive infrastructure project since its independence in 1963. Chinese banks provided 4.7 billion US dollars for the construction of the 470-kilometer line, which was built by the China Road & Bridge Corporation (CRBC) as main contractor.
The original plan was to connect the port of Mombasa with Kenya’s neighboring landlocked countries in East Africa, such as Uganda and Rwanda. However, the freight traffic, which was supposed to transport around 22 million tons of cargo annually, is not getting off the ground. The line ends in the Kenyan town of Naivasha, around 300 kilometers from the Ugandan border. Many freight trains return empty to Mombasa from there.
And so, the railway flagship project has turned into a problem. Its main investor, the Chinese Exim Bank, no longer wants to provide more funds for the extension. The Chinese rejected a Kenyan application to extend the loan by 30 years. The reasons: Firstly, no economic feasibility study was acceptable to the Chinese. Secondly, due to the weakening economy back home, China only provides money for selected and generally smaller Belt and Road Initiative (BRI) projects.
During the term of President Uhuru Kenyatta, Kenya had many projects funded with Chinese money between 2013 and 2022, including roads and motorways and a deep-water port in Lamu. According to the Kenyan Ministry of Finance, the country had foreign debt of 36.66 billion US dollars at the end of March 2023; the outstanding Chinese loans amounted to 6.3 billion US dollars, which accounted for around 64 percent of Kenya’s current bilateral foreign debt. At 17 billion US dollars, Kenya’s debt to the International Monetary Fund (IMF) and the World Bank (WB) is significantly higher.
Including domestic debt, Kenya’s debt burden is more than 10.1 trillion shillings (58 billion euros), which is 67 percent of its gross domestic product. At the same time, the value of the Kenyan shilling has fallen to a record low. This increases the burden of repayment and is reflected in the national budget. There is not enough money for health and education. The anger over higher taxes and living costs culminated in protests in Nairobi and other parts of the country last year.
The debt problem and Beijing’s opaque investment conditions have fuelled the population’s mistrust of Chinese activities in the country. Conspiracy theories about a total sell-off of the port in Mombasa or entire Nairobi neighborhoods to China are circulating. During the last election campaign, a strong stance against China also played an important role. Incumbent President William Ruto promised at the time to minimize China’s influence, stop excessive borrowing and disclose non-transparent past contracts. However, hardly any of this has been done so far.
In October 2023, Ruto and a delegation traveled to Beijing to attend Xi Jinping’s third BRI forum. There, he asked Beijing for an additional loan of one billion US dollars to complete road construction projects that had stalled due to financial difficulties. Ruto’s Deputy, Rigathi Gachagua, said Ruto would travel to China and ask for “more time to repay the debt slowly.”
One month later, Ruto opened Kenya’s first smartphone plant, a joint venture between the Kenyan telecoms companies Safaricom, Jamii and the Chinese mobile device retailer Shenzhen Teleone Technology. The components of the smartphones assembled there are all imported from China.
Ruto’s strategy is to play both sides. More than his predecessors, he is once again leaning towards the West. In December 2022, he traveled to Washington for the US-Africa Leaders’ Summit. In February, he inaugurated the first EU-Kenya Economic Forum in Nairobi. He received former British Foreign Secretary James Cleverly and German Chancellor Olaf Scholz – and traveled to Brussels and Berlin himself.
At home, however, this is precisely why the politically very active Kenyans criticize Ruto: While he drastically reduced foreign travel for civil servants in order to save money in the national budget, he happily travels around the world to please all fronts.
Sinolytics is a research-based business consultancy entirely focused on China. It advises European companies on their strategic orientation and specific business activities in the People’s Republic.
The global economy demonstrated remarkable resilience in 2023, as the United States defied expectations and managed to avoid a recession. India, Vietnam, and Japan also achieved impressive economic performance given the circumstances. But while these countries have good reasons to be optimistic about 2024, China will most likely be the single largest contributor to global GDP growth this year.
This may come as a surprise to many, given the wave of increasingly gloomy forecasts for the Chinese economy. To be sure, China may not reach its full potential in 2024. Only by pursuing meaningful reforms and reaffirming economic openness (the two pillars of the country’s remarkably successful growth model over the past four decades) can it regain its lost momentum.
The relative contribution of a country to global GDP growth depends on both its share in the world economy and its relative economic growth. In purchasing-power-parity (PPP) terms, China’s share of the world economy was 18.8 percent in 2023, compared to America’s 15.4 percent. With the International Monetary Fund projecting that the Chinese economy will grow by 4.6 percent in 2024 – more than double the projected growth for the US-China, despite its ongoing slowdown, will likely account for a much larger share of global GDP growth than the US will.
After a quarter-century of stagnation, Japan seems to be experiencing an economic revival. Having finally escaped the deflationary trap that ensnared its economy for more than three decades, the country is projected to grow by 1 percent in 2024. Nevertheless, its contribution to global growth will be more limited than that of either China or the US, owing to its smaller share of the world economy and slower growth.
Meanwhile, the outlook for the United Kingdom and the European Union appears bleak. Barring an unexpected and unlikely resolution to the war in Ukraine, the best-case scenario for Europe’s economy is that it will not impede global growth.
India, which is projected to grow by 6.3 percent this year, is expected to be the only major economy to grow faster than China. Geopolitical developments have been favorable to India, enabling it to buy cheap Russian oil, get away with measures that would be impossible if they were undertaken by China, and assert itself on the world stage. These favorable developments, together with domestic reforms pursued by Prime Minister Narendra Modi’s government, have also led to a surge in foreign direct investment. But, because India’s share of the world economy is less than half of China’s, its contribution to global growth will be smaller than that of China as well.
Similarly, developing countries such as Vietnam, Tanzania, Guyana, Gambia, Ethiopia, Djibouti, Côte d’Ivoire, and Burkina Faso are projected to grow rapidly in 2024. But all account for a very small share of the world economy.
Although China is expected to remain the largest contributor to global GDP growth, it could underperform relative to its growth potential – which I estimate to be around 5.1 percent – in 2024. Moreover, the positive spillover from Chinese growth to other economies will also be more limited if the country’s import growth does not return to pre-pandemic levels.
China’s main medium-term economic challenge is its shrinking workforce. Even if productivity growth remains constant, this demographic shift would put downward pressure on GDP growth. Given the current slump in the Chinese property sector, slower-than-expected household spending, and private-sector investment, the chances of another real-estate-driven economic boom appear slim.
But the greatest threat facing the Chinese economy today is a fall into a debt-deflation trap. Because deflation increases the real value of existing debts, banks could become increasingly reluctant to provide loans to businesses and local governments. As indebted households and businesses cut their spending, the toxic combination of debt and deflation could trigger a vicious cycle of lower investment and reduced demand.
Chinese monetary authorities’ reluctance to adopt a more expansionary monetary policy is unhelpful. While the People’s Bank of China (PBOC) and the country’s banking regulator have set key performance indicators on loan scale to stimulate lending, state-owned commercial banks often meet these targets by providing loans to unproductive state-owned enterprises (SOEs) that do not require urgent financing as much as many non-state-owned enterprises.
In fact, SOEs typically receive loans at lower interest rates than the rates on the banks’ wealth-management products. Instead of investing these funds in productive projects, they often redeposit them for a higher interest rate, allowing the banks to re-lend to the same SOEs. While this process inflates the banks’ reported loan and deposit figures, creating the appearance of effective monetary policy, such practices do little to boost production, employment, and tax revenues.
To avoid a deflation-debt spiral, Chinese policymakers must urgently inject more liquidity into the economy. But for the lending channel to work effectively, China must reform its state-owned banks to ensure that financial institutions focus on profitability and lend to the most productive firms, rather than creating artificial money flows. Unfortunately, China is unlikely to undertake these critical reforms anytime soon.
There is an alternative policy package in the short run. Chinese policymakers could pair an aggressive fiscal policy with the monetization of government debt. This would entail a three-step plan.
With more expansionary monetary policy in the short run and structural policy reforms in the medium term, the Chinese economy could move closer to its full growth potential, which would help lift global economic growth as well.
Shang-Jin Wei, a former chief economist at the Asian Development Bank, is Professor of Finance and Economics at Columbia Business School and Columbia University’s School of International and Public Affairs.
Copyright: Project Syndicate, 2024.
www.project-syndicate.org
White as snow, red as blood, black as ebony: The centuries-old city wall of Xi’an is seasonally decorated in the colors of one of the Brothers Grimm’s most famous fairy tales.
Premier Li Qiang has surprisingly revealed the economic data for 2023 at the World Economic Forum in Davos. The second-largest economy grew by “around 5.2 percent” in 2023, Li said in his keynote speech. China had thus exceeded its growth target set in the spring. Above all, it was well above the three percent of 2022. Li used the rest of his speaking time to campaign for more investment and more confidence in China, as Marcel Grzanna reports. He promised foreign companies that the important middle-class target group would continue to grow, as well as several regulatory relaxations.
Nevertheless, skepticism is likely to be quite high. Foreign companies have been waiting too long for Beijing to fulfill its announcements, for example, regarding public contracts. They will not be convinced unless something changes.
Li also used his presence in Davos for a meeting with top Wall Street decision-makers – including Jamie Dimon, head of JP Morgan. After the lunch, which was also attended by China’s new central bank governor, Pan Gongsheng, Dimon told Reuters: “I’m glad that people are all talking.” After all, such meetings are why so many big names from business and politics make the trip to Davos every year.
Meanwhile, Foreign Minister Wang Yi is currently traveling through several African countries. Although Kenya is not among them, we are looking at the country trying to cooperate with the West and China. Kenya is struggling under the debts that a train line between Nairobi and Mombasa, planned years ago as a flagship project, has left it with, writes Fabian Peltsch.
As things stand today, this railway is too expensive and not economical enough. Due to a lack of prospects, China no longer wants to give the country more money for the project. However, Kenya’s President Ruto needs more infrastructure – and is now looking to the West in his search for investors.
Premier Li Qiang used his special speech at the World Economic Forum in Davos on Tuesday to unveil Chinese economic data in advance. Li revealed to the audience that the second-largest economy grew by “around 5.2 percent” in 2023. Usually, the National Bureau of Statistics announces the data first. The publication is scheduled for Wednesday.
Such a breach of protocol is truly rare in China. But the end justifies the means. Li used the figure to drum up interest in more cooperation with and more foreign investment in the People’s Republic on the big stage. His country’s economy has recovered and grew faster than expected last year, Li beckoned. “Just as a healthy person often has a strong immune system, the Chinese economy can handle ups and downs in its performance.”
After a weak 2022, China has indeed regained significant economic strength. However, Li is probably well aware that lifting the Covid restrictions in his country has by no means eradicated the roots of the problem. Consequently, he has painted a rosy outlook for domestic consumption. Consumption is supposed to be China’s future growth driver. However, it is currently probably the biggest economic vulnerability.
He promised the country’s middle-income population would double to 800 million over the next ten years. The high-tech sector, green energy, and 300 million additional migrants – supposedly in the starting blocks to move to the cities and further increase the demand for housing there – are the driving forces behind rising incomes and, subsequently, thriving domestic consumption. It is a message to foreign companies, many of which produce consumer goods for the Chinese middle class.
Indeed, for many years, such promises were enough for Beijing to generate enthusiasm for China as a business hub. However, the policies of recent years have tarnished the country’s credibility: threats against Taiwan, power games with neighbors in the South China Sea, human rights violations in Xinjiang and Tibet and Hong Kong’s unlawful de-democratization.
This is why Li used lofty words right at the beginning to call for more confidence in his country. Because that is what investors and developed countries are losing. Certainly not only because companies and chambers complain about the politicization of the business environment – but also because foreign companies are still not equally treated, despite promises.
For example, Li said that policies for public tenders will be reformed. Foreign bidders are usually barred from the outset. The opening up of China’s market has been a main demand, for example, from the EU Chamber of Commerce. The flow of cross-border data will also be simplified. In November, Beijing presented a draft to ease the strict rules for international data transfer. Since then, companies have been pushing for rapid implementation. “The traditional Chinese culture very much values credibility. China is a country that attaches great importance to commitments and honors its words with concrete actions,” Li said.
But who will still take such promises from the Chinese government at face value in 2024 and build their business strategy on them? The West’s de-risking has long since begun. In this context, Li complained about a massive increase in the isolation towards his country. He even had a figure: 5,400 measures compared to less than 3,000 before the pandemic.
In Doris Fischer’s view, the US Chip Act, for example, which largely prevents China from obtaining high-end chips from the United States, is “painful.” However, Fischer also sees such targeted measures as an “incentive.” She predicts: “In addition to evasion strategies, efforts in corresponding research and development in China will continue to increase, both in an orchestrated form by the government and on the part of companies,” Fischer told Table.Media.
However, EU Commission President Ursula von der Leyen, who spoke immediately after Li, immediately reminded the Premier of China’s own protectionism. As an example, she cited the fact that the People’s Republic introduced export controls on the crucial technology raw materials gallium and germanium last October. The problems must be clearly addressed, said von der Leyen.
Li gave the world a handful of suggestions on how to restore mutual trust. More cooperation, more communication, more exchange: But this is nothing that has not been mentioned countless times.
Between the lines, Li’s proposals were clearly aimed at not denying China access to foreign technologies and giving the voices of the emerging economies, including the People’s Republic, a greater say. For example, in artificial intelligence, Li spoke in favor of an international regulatory framework and the introduction of red, ethical lines for the development of AI technologies.
However, he firmly insisted that these rules should not just be set by “a few countries” – but that all nations should be involved in their development. But the willingness of the Americans or Europeans to cooperate certainly also depends on Chinese concessions. Contribution: Felix Lee
China’s Foreign Minister Wang Yi is currently back in Africa. And even though he is not visiting Kenya this time, China’s influence can be felt everywhere in the country. For example, traveling on the railway line from Mombasa to Nairobi, financed by bank loans from the People’s Republic, is a very Chinese experience. Making the journey on decommissioned Chinese trains with tickets and staff uniforms almost identical to those in the People’s Republic. There are even the typical hot water dispensers between the compartments. However, they are not turned on. Unlike the Chinese, Kenyans apparently have no need to brew instant noodles on long train journeys.
Commissioned in 2017, the Standard Gauge Railway (SGR) from Kenya’s inland to Mombasa on the coast is the country’s most expensive infrastructure project since its independence in 1963. Chinese banks provided 4.7 billion US dollars for the construction of the 470-kilometer line, which was built by the China Road & Bridge Corporation (CRBC) as main contractor.
The original plan was to connect the port of Mombasa with Kenya’s neighboring landlocked countries in East Africa, such as Uganda and Rwanda. However, the freight traffic, which was supposed to transport around 22 million tons of cargo annually, is not getting off the ground. The line ends in the Kenyan town of Naivasha, around 300 kilometers from the Ugandan border. Many freight trains return empty to Mombasa from there.
And so, the railway flagship project has turned into a problem. Its main investor, the Chinese Exim Bank, no longer wants to provide more funds for the extension. The Chinese rejected a Kenyan application to extend the loan by 30 years. The reasons: Firstly, no economic feasibility study was acceptable to the Chinese. Secondly, due to the weakening economy back home, China only provides money for selected and generally smaller Belt and Road Initiative (BRI) projects.
During the term of President Uhuru Kenyatta, Kenya had many projects funded with Chinese money between 2013 and 2022, including roads and motorways and a deep-water port in Lamu. According to the Kenyan Ministry of Finance, the country had foreign debt of 36.66 billion US dollars at the end of March 2023; the outstanding Chinese loans amounted to 6.3 billion US dollars, which accounted for around 64 percent of Kenya’s current bilateral foreign debt. At 17 billion US dollars, Kenya’s debt to the International Monetary Fund (IMF) and the World Bank (WB) is significantly higher.
Including domestic debt, Kenya’s debt burden is more than 10.1 trillion shillings (58 billion euros), which is 67 percent of its gross domestic product. At the same time, the value of the Kenyan shilling has fallen to a record low. This increases the burden of repayment and is reflected in the national budget. There is not enough money for health and education. The anger over higher taxes and living costs culminated in protests in Nairobi and other parts of the country last year.
The debt problem and Beijing’s opaque investment conditions have fuelled the population’s mistrust of Chinese activities in the country. Conspiracy theories about a total sell-off of the port in Mombasa or entire Nairobi neighborhoods to China are circulating. During the last election campaign, a strong stance against China also played an important role. Incumbent President William Ruto promised at the time to minimize China’s influence, stop excessive borrowing and disclose non-transparent past contracts. However, hardly any of this has been done so far.
In October 2023, Ruto and a delegation traveled to Beijing to attend Xi Jinping’s third BRI forum. There, he asked Beijing for an additional loan of one billion US dollars to complete road construction projects that had stalled due to financial difficulties. Ruto’s Deputy, Rigathi Gachagua, said Ruto would travel to China and ask for “more time to repay the debt slowly.”
One month later, Ruto opened Kenya’s first smartphone plant, a joint venture between the Kenyan telecoms companies Safaricom, Jamii and the Chinese mobile device retailer Shenzhen Teleone Technology. The components of the smartphones assembled there are all imported from China.
Ruto’s strategy is to play both sides. More than his predecessors, he is once again leaning towards the West. In December 2022, he traveled to Washington for the US-Africa Leaders’ Summit. In February, he inaugurated the first EU-Kenya Economic Forum in Nairobi. He received former British Foreign Secretary James Cleverly and German Chancellor Olaf Scholz – and traveled to Brussels and Berlin himself.
At home, however, this is precisely why the politically very active Kenyans criticize Ruto: While he drastically reduced foreign travel for civil servants in order to save money in the national budget, he happily travels around the world to please all fronts.
Sinolytics is a research-based business consultancy entirely focused on China. It advises European companies on their strategic orientation and specific business activities in the People’s Republic.
The global economy demonstrated remarkable resilience in 2023, as the United States defied expectations and managed to avoid a recession. India, Vietnam, and Japan also achieved impressive economic performance given the circumstances. But while these countries have good reasons to be optimistic about 2024, China will most likely be the single largest contributor to global GDP growth this year.
This may come as a surprise to many, given the wave of increasingly gloomy forecasts for the Chinese economy. To be sure, China may not reach its full potential in 2024. Only by pursuing meaningful reforms and reaffirming economic openness (the two pillars of the country’s remarkably successful growth model over the past four decades) can it regain its lost momentum.
The relative contribution of a country to global GDP growth depends on both its share in the world economy and its relative economic growth. In purchasing-power-parity (PPP) terms, China’s share of the world economy was 18.8 percent in 2023, compared to America’s 15.4 percent. With the International Monetary Fund projecting that the Chinese economy will grow by 4.6 percent in 2024 – more than double the projected growth for the US-China, despite its ongoing slowdown, will likely account for a much larger share of global GDP growth than the US will.
After a quarter-century of stagnation, Japan seems to be experiencing an economic revival. Having finally escaped the deflationary trap that ensnared its economy for more than three decades, the country is projected to grow by 1 percent in 2024. Nevertheless, its contribution to global growth will be more limited than that of either China or the US, owing to its smaller share of the world economy and slower growth.
Meanwhile, the outlook for the United Kingdom and the European Union appears bleak. Barring an unexpected and unlikely resolution to the war in Ukraine, the best-case scenario for Europe’s economy is that it will not impede global growth.
India, which is projected to grow by 6.3 percent this year, is expected to be the only major economy to grow faster than China. Geopolitical developments have been favorable to India, enabling it to buy cheap Russian oil, get away with measures that would be impossible if they were undertaken by China, and assert itself on the world stage. These favorable developments, together with domestic reforms pursued by Prime Minister Narendra Modi’s government, have also led to a surge in foreign direct investment. But, because India’s share of the world economy is less than half of China’s, its contribution to global growth will be smaller than that of China as well.
Similarly, developing countries such as Vietnam, Tanzania, Guyana, Gambia, Ethiopia, Djibouti, Côte d’Ivoire, and Burkina Faso are projected to grow rapidly in 2024. But all account for a very small share of the world economy.
Although China is expected to remain the largest contributor to global GDP growth, it could underperform relative to its growth potential – which I estimate to be around 5.1 percent – in 2024. Moreover, the positive spillover from Chinese growth to other economies will also be more limited if the country’s import growth does not return to pre-pandemic levels.
China’s main medium-term economic challenge is its shrinking workforce. Even if productivity growth remains constant, this demographic shift would put downward pressure on GDP growth. Given the current slump in the Chinese property sector, slower-than-expected household spending, and private-sector investment, the chances of another real-estate-driven economic boom appear slim.
But the greatest threat facing the Chinese economy today is a fall into a debt-deflation trap. Because deflation increases the real value of existing debts, banks could become increasingly reluctant to provide loans to businesses and local governments. As indebted households and businesses cut their spending, the toxic combination of debt and deflation could trigger a vicious cycle of lower investment and reduced demand.
Chinese monetary authorities’ reluctance to adopt a more expansionary monetary policy is unhelpful. While the People’s Bank of China (PBOC) and the country’s banking regulator have set key performance indicators on loan scale to stimulate lending, state-owned commercial banks often meet these targets by providing loans to unproductive state-owned enterprises (SOEs) that do not require urgent financing as much as many non-state-owned enterprises.
In fact, SOEs typically receive loans at lower interest rates than the rates on the banks’ wealth-management products. Instead of investing these funds in productive projects, they often redeposit them for a higher interest rate, allowing the banks to re-lend to the same SOEs. While this process inflates the banks’ reported loan and deposit figures, creating the appearance of effective monetary policy, such practices do little to boost production, employment, and tax revenues.
To avoid a deflation-debt spiral, Chinese policymakers must urgently inject more liquidity into the economy. But for the lending channel to work effectively, China must reform its state-owned banks to ensure that financial institutions focus on profitability and lend to the most productive firms, rather than creating artificial money flows. Unfortunately, China is unlikely to undertake these critical reforms anytime soon.
There is an alternative policy package in the short run. Chinese policymakers could pair an aggressive fiscal policy with the monetization of government debt. This would entail a three-step plan.
With more expansionary monetary policy in the short run and structural policy reforms in the medium term, the Chinese economy could move closer to its full growth potential, which would help lift global economic growth as well.
Shang-Jin Wei, a former chief economist at the Asian Development Bank, is Professor of Finance and Economics at Columbia Business School and Columbia University’s School of International and Public Affairs.
Copyright: Project Syndicate, 2024.
www.project-syndicate.org
White as snow, red as blood, black as ebony: The centuries-old city wall of Xi’an is seasonally decorated in the colors of one of the Brothers Grimm’s most famous fairy tales.
