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COVID-zero is gone. Can China get its economy back on track in 2023?

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A Chinese flag flutters on a ship in front of a globe in Shanghai, China on Aug. 2, 2022.ALY SONG/Reuters

Masks aside, the crowds in train stations and airports across China this month, as tens of millions criss-crossed the country for the Lunar New Year, were almost indistinguishable from those before the pandemic.

Normalcy is finally returning to China, after years of some of the world’s toughest COVID-19 policies, which were finally, and surprisingly, relaxed in the final weeks of 2022. But as the sense of whiplash – and resulting infections – begins to fade, the question is whether the country can get its economy back on track.

Initial data for 2023 has been positive: On Tuesday, the National Bureau of Statistics said January saw a rebound in economic activity, with the official purchasing managers’ index (PMI) for the manufacturing sector hitting a four-month high of 50.1, up from 47 in December. Any score over 50 indicates growth.

The non-manufacturing PMI, which measures activity in the construction and services sectors, reached 54.4 in January, up from 41.6 the month before and its highest level since June, 2022.

The Lunar New Year period saw a return to near-prepandemic levels of travel and spending. Revenue for the hospitality and tourism sectors was at 80 per cent of 2019 levels, up 130 per cent from 2021, according to official data, with the number of trips also nearly matching prepandemic figures.

Stock markets were closed for the holiday, but have seen a boost this week, with at least one board entering bull market territory as traders reacted to the end of China’s zero-COVID policy and early indications of an economic recovery.

“All indicators point to a relatively healthy recovery,” said Zhu Tian, a professor of economics at the Shanghai-based China Europe International Business School. “The government has put economic growth back at the centre of policy.”

An official GDP target will not be set until a meeting of the National People’s Congress in March, but most expect it to be around 5.5 per cent, similar to last year’s target. GDP fell well short in 2022, however, with the economy officially growing just 3 per cent, the second-lowest rate since the 1970s, and many analysts questioning if it even did that well.

While having the “annus horribilis” of 2022 as a base year will make a 5.5- or even 6.5-per-cent growth target easier to hit, China will continue to face a challenging global environment, with concerns about recession or lacklustre growth in Europe and North America, as well as ongoing geopolitical tensions.

For years, China has sought to build up its domestic markets in order to reduce its reliance on foreign demand. In 2020, President Xi Jinping promised that in the future domestic consumption would play a “dominant role,” and at a meeting of the State Council over the weekend, Premier Li Keqiang called for the restoration of “the structural role of consumption in the economy.”

“The greatest potential of the Chinese economy lies in the consumption by the 1.4 billion people,” Mr. Li said.

That is easier said than done, however, and has been said many times before. Household spending accounted for 38 per cent of Chinese GDP last year, almost half that of the United States. Even with the economic struggles of the pandemic, many Chinese boosted their savings, but they have so far declined to part with that money.

“There’s all this cash sitting in bank accounts,” said Paul Schulte, a Singapore-based analyst and founder of Schulte Research. He noted that there have been “powerful disincentives to spend,” not just the pandemic, but also the poor performance of Chinese stocks and the relative stalling of the real estate market in recent years.

The most obvious way to get that cash out of accounts is to lower interest rates and encourage people to invest their money, but that takes time, said Mr. Schulte, who worked for years as an investment banker in Hong Kong. A short-term solution would be introducing tax or spending incentives, such as vouchers.

According to Caixin, a Chinese financial publication, at least 25 of 31 provincial governments have listed increasing household consumption among their policy goals for 2023, part of their overall growth targets of 5 to 6.5 per cent. Guangdong, the southern province bordering Hong Kong that has long been a manufacturing powerhouse, has set particularly aggressive targets, promising its GDP will exceed three trillion yuan ($590-billion) in 2023, an increase of 6 per cent, with consumption as a major driver.

“It’s impossible to continue competing on land, price and labour,” Guangdong Communist Party chief Huang Kunming said in a speech. “The whole province needs to be aware of this issue.”

Wang Zhenzhong, a former senior economist at the Chinese Academy of Social Sciences, told The Globe and Mail he expected to see a renewed focus on boosting employment, which dropped over the pandemic and is a particularly acute problem for young people. As part of this, he said, there will likely be more policies geared toward entrepreneurs.

“The biggest concern for both families and individuals in China right now is employment, which will directly affect domestic demand and consumption,” he said.

Prof. Zhu agreed, saying that “if employment goes up and salaries go up, then people’s income will as well, and naturally consumption and domestic demand will increase.” He added that China’s high savings rate was not a negative, as it could help drive domestic investment in the long run, which will reduce dependence on foreign cash.

As well as boosting the domestic market, China’s leaders have sought to reassure foreign investors by tamping down some of the more Marxist rhetoric of recent years. A meeting of the Central Economic Work Conference in December repeatedly emphasized the need for “reform” and “openness,” a message that was echoed by Vice-Premier Liu He in Davos this month, where he promised that “China’s door to the outside will only open wider.”

“More focus will be placed on expanding domestic demand, keeping supply chains stable, supporting the private sector, reforming the state-owned enterprises, attracting foreign investment and preventing economic and financial risks,” Mr. Liu said.

According to an assessment by the New York-based Asia Society Policy Institute, such statements are designed “to assure the private sector that Xi Jinping is not ideologically hostile to its growing role in the Chinese economy and that the Party does not politically prefer state-owned enterprises.”

Even the tech sector, which has been battered by a years-long regulatory and political crackdown that has wiped billions off the valuations of several companies, appears to be exiting the storm. But whether this is enough to restore investor confidence, both domestic and foreign, remains to be seen.

“Do we believe this turn?” Mr. Schulte asked. “I think the answer is: We believe it for now.”

With files from Alexandra Li

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Economy

Here is Trump economy: Slower growth, higher prices and a bigger national debt

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If Donald Trump is re-elected president of the United States in November, Americans can expect higher inflation, slower economic growth and a larger national debt, according to economists.

Trump’s economic agenda for a second term in office includes raising tariffs on imports, cutting taxes and deporting millions of undocumented migrants.

“Inflation will be the main impact” of a second Trump presidency, Bernard Yaros, lead US economist at Oxford Economics, told Al Jazeera.

“That’s ultimately the biggest risk. If Trump is president, tariffs are going up for sure. The question is how high do they go and how widespread are they,” Yaros said.

Trump has proposed imposing a 10 percent across-the-board tariff on all imported goods and levies of 60 percent or higher on Chinese imports.

During Trump’s first term in office from 2017 to 2021, his administration introduced tariff increases that at their peak affected about 10 percent of imports, mostly goods from China, Moody’s Analytics said in a report released in June.

Those levies nonetheless inflicted “measurable economic damage”, particularly to the agriculture, manufacturing and transportation sectors, according to the report.

“A tariff increase covering nearly all goods imports, as Trump recently proposed, goes far beyond any previous action,” Moody’s Analytics said in its report.

Businesses typically pass higher tariffs on to their customers, raising prices for consumers. They could also affect businesses’ decisions about how and where to invest.

“There are three main tenets of Trump’s campaign, and they all point in the same inflationary direction,” Matt Colyar, assistant director at Moody’s Analytics, told Al Jazeera.

“We didn’t even think of including retaliatory tariffs in our modelling because who knows how widespread and what form the tit-for-tat model could involve,” Colyar added.

‘Recession becomes a serious threat’

When the US opened its borders after the COVID-19 pandemic, the inflow of immigrants helped to ease labour shortages in a range of industries such as construction, manufacturing, leisure and hospitality.

The recovery of the labour market in turn helped to bring down inflation from its mid-2022 peak of 9.1 percent.

Trump has not only proposed the mass deportation of 15 million to 20 million undocumented migrants but also restricting the inflow of visa-holding migrant workers too.

That, along with a wave of retiring Baby Boomers – an estimated 10,000 of whom are exiting the workforce every day – would put pressure on wages as it did during the pandemic, a trend that only recently started to ease.

“We can assume he will throw enough sand into the gears of the immigration process so you have meaningfully less immigration, which is inflationary,” Yaros said.

Since labour costs and inflation are two important measures that the US Federal Reserve weighs when setting its benchmark interest rate, the central bank could announce further rate hikes, or at least wait longer to cut rates.

That would make recession a “serious threat once again”, according to Moody’s.

Adding to those inflationary concerns are Trump’s proposals to extend his 2017 tax cuts and further lower the corporate tax rate from 21 percent to 20 percent.

While Trump’s proposed tariff hikes would offset some lost revenue, they would not make up the shortfall entirely.

According to Moody’s, the US government would generate $1.7 trillion in revenue from Trump’s tariffs while his tax cuts would cost $3.4 trillion.

Yaros said government spending is also likely to rise as Republicans seek bigger defence budgets and Democrats push for greater social expenditures, further stoking inflation.

If President Joe Biden is re-elected, economists expect no philosophical change in his approach to import taxes. They think he will continue to use targeted tariff increases, much like the recently announced 100 percent tariffs on Chinese electric vehicles and solar panels, to help US companies compete with government-supported Chinese firms.

With Trump’s tax cuts set to expire in 2025, a second Biden term would see some of those cuts extended, but not all, Colyar said. Primarily, the tax cuts to higher earners like those making more than $400,000 a year would expire.

Although Biden has said he would hike corporate taxes from 21 percent to 28 percent, given the divided Congress, it is unlikely he would be able to push that through.

The contrasting economic visions of the two presidential candidates have created unwelcome uncertainty for businesses, Colyar said.

“Firms and investors are having a hard time staying on top of [their plans] given the two different ways the US elections could go,” Colyar said.

“In my entire tenure, geopolitical risk has never been such an important consideration as it is today,” he added.

 

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China Stainless Steel Mogul Fights to Avoid a Second Collapse

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Chinese metal tycoon Dai Guofang’s first steel empire was brought down by a government campaign to rein in market exuberance, tax evasion accusations and a spell behind bars. Two decades on, he’s once again fighting for survival.

A one-time scrap-metal collector, he built and rebuilt a fortune as China boomed. Now with the economy cooling, Dai faces a debt crisis that threatens the future of one of the world’s top stainless steel producers, Jiangsu Delong Nickel Industry Co., along with plants held by his wife and son. Its demise would send ripples through the country’s vast manufacturing sector and the embattled global nickel market.

 

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Why Trump’s re-election could hit Europe’s economy by at least €150 billion

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A Trump victory could trigger a 1% GDP hit to the eurozone economy, with Germany, Italy, and Finland most affected. Renewed NATO demands and potential cessation of US aid to Ukraine could further strain Europe.

The potential re-election of Donald Trump as US President poses a significant threat to the eurozone economy, with economists warning of a possible €150 billion hit, equivalent to about 1% of the region’s gross domestic product. This impact stems from anticipated negative trade repercussions and increased defence expenditures.

The recent attack in Butler, Pennsylvania, where former President Trump sustained an ear injury, has boosted his re-election odds. Prediction markets now place Trump’s chances of winning at 71%, a significant rise from earlier figures, while his opponent, Joe Biden, has experienced a sharp decline, with his chances dropping to 18% from a peak of 45% just two months ago.

Rising trade uncertainty and economic impact from tariffs

Economists James Moberly and Sven Jari Stehn from Goldman Sachs have raised alarms over the looming uncertainty in global trade policies, drawing parallels to the volatility experienced in 2018 and 2019. They argue that Trump’s aggressive trade stance could reignite these uncertainties.

“Trump has pledged to impose an across-the-board 10% tariff on all US imports including from Europe,” Goldman Sachs outlined in a recent note.

The economists predict that the surge in trade policy uncertainty, which previously reduced Euro area industrial production by 2% in 2018-19, could now result in a 1% decline in Euro area gross domestic product.

Germany to bear the brunt, followed by Italy

Germany, Europe’s industrial powerhouse, is expected to bear the brunt of this impact.

“We estimate that the negative effects of trade policy uncertainty are larger in Germany than elsewhere in the Euro area, reflecting its greater openness and reliance on industrial activity,” Goldman Sachs explained.

The report highlighted that Germany’s industrial sector is more vulnerable to trade disruptions compared to other major Eurozone economies such as France.

After Germany, Italy and Finland are projected to be the second and third most affected countries respectively, due to the relatively higher weight of manufacturing activity in their economies.

According to a Eurostat study published in February 2024, Germany (€157.7 billion), Italy (€67.3 billion), and Ireland (€51.6 billion) were the three largest European Union exporters to the United States in 2023.

Germany also maintained the largest trade surplus (€85.8 billion), followed by Italy (€42.1 billion).

Defence, security pressures and financial condition shifts

A Trump victory would also be likely to bring renewed defence and security pressures to Europe. Trump has consistently pushed for NATO members to meet their 2% GDP defence spending commitments. Currently, EU members spend about 1.75% of GDP on defence, necessitating an increase of 0.25% to meet the target.

Moreover, Trump has indicated that he might cease US military aid to Ukraine, compelling European nations to step in. The US currently allocates approximately €40bn annually (or 0.25% of EU GDP) for Ukrainian support. Consequently, meeting NATO’s 2% GDP defence spending requirement and offsetting the potential reduction in US military aid could cost the EU an additional 0.5% of GDP per year.

Additional economic shocks from Trump’s potential re-election include heightened US foreign demand due to tax cuts and the risk of tighter financial conditions driven by a stronger dollar.

However, Goldman Sachs believes that the benefits from a looser US fiscal policy would be marginal for the European economy, with by a mere 0.1% boost in economic activity.

“A Trump victory in the November election would likely come with significant financial market shifts,” Goldman Sachs wrote.

Reflecting on the aftermath of the 2016 election, long-term yields surged, equity prices soared, and the dollar appreciated significantly. Despite these movements, the Euro area Financial Conditions Index (FCI) only experienced a slight tightening, as a weaker euro counterbalanced higher interest rates and wider sovereign spreads.

In conclusion, Trump’s potential re-election could have far-reaching economic implications for Europe, exacerbating trade uncertainties and imposing new financial and defence burdens on the continent.

 

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