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Here's how China became the world's No. 2 economy and how it plans on being No. 1 – CNBC

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China’s President Xi Jinping raises his glass and proposes a toast at the end of his speech during the welcome banquet for leaders attending the Belt and Road Forum at the Great Hall of the People in Beijing on April 26, 2019.

Nicholas Asfouri | AFP | Getty Images

China is on the cusp of keeping a big promise — a vow to double its GDP and income in a decade and take the country to the forefront of the global economic power structure.

The nation now faces the challenge of keeping the momentum going in the face of mounting challenges.

The ascension began in the late 1970s with a move to more open markets. It continued through aggressive central planning, utilizing the advantages of cheap labor, a devalued currency and a robust factory system to spread its products around the world.

All of that changed the economy from slumbering rural decay to a prospering diverse superpower. The country now seems on a inexorable path to No. 1.

China has climbed to No. 2 in the world, with a GDP of $13.1 trillion that, while still trailing the U.S., keeps getting closer. Forecasters expect that growth just north of 6% in 2020 will get to the stated goal of doubling the economy from 2011-20.

On the other hand, China also is a country that appears to be taking the worst of the trade war with the U.S. and faces myriad other challenges to keep up to torrid pace of growth.

The future awaits, then, however complicated.

“Going forward, China is going to continue to be very competitive,” said Michael Yoshikami, founder of Destination Wealth Management. “China is still going to be a global player. But it’s a matter of managing expectations relative to what you think is going to happen.”

Soldiers wait for a container ship to berth at Qingdao Port on March 8, 2018 in Qingdao, China.

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Indeed, a nation with growth that would be the envy of virtually anywhere else in the world is seeing, in relative terms at least, a significant slowdown. Growth peaked at 14.2% in 2007 but has declined to below 7% annually each year since 2015, according to World Bank figures.

‘Tariffs are hurting’

Yoshikami’s firm is based in San Francisco, but he does significant investing business with China and travels there frequently.

What he sees is a nation leading the way in education and technological innovation but suffering under the weight of U.S. tariffs on Chinese imports, as well as the rising cost of labor and slowing manufacturing.

“The Chinese economy is targeted to grow at 7%. It was growing at 14%. If it grows at 6%, that’s still a lot, but you’re going to see a lot of negative sentiment,” Yoshikami said. “If you talk to people in China, the average person is not as optimistic as they were two years ago or four years ago or six years ago.”

One big negative has been the trade war.

While the two sides appear on their way to a small-scale phase-one agreement on tariffs, much is left to be done, and the ramifications are being felt through the Chinese economy.

A truck moves a shipping container at Qingdao Port on January 14, 2019 in Qingdao, Shandong Province of China.

VCG | Getty Images

“The average person believes that the trade tariffs are hurting,” Yoshikami said. “Inflation is up. The cost of basic foodstuffs has gone up 10% to 15%. The cost of pork has gone up 100%. So you literally have people changing their diet because they simply can’t afford the product anymore.”

“It’s hurt them a lot,” he added. “The U.S. would certainty welcome a deal. But China really needs a deal.”

On one hand, Yoshikami sees rapid and widespread advancements that allow consumers to buy goods on apps like AliExpress that provide cheap products at no shipping charges. Consumers line up for Levi Strauss jeans and other products as they still covet American goods as symbols of U.S. economic hegemony.

But there’s an overhang.

Taking stock of tariffs

The trade war damage to the economy is palpable and measurable.

Fiscal revenue growth has fallen to 3.8% in 2019 from 6.2% a year ago as the rise in tax receipts has been barely positive after increasing 8.3% in 2018, according to Nomura Global Economics, citing data through October. In addition, export growth declined 0.3% through November after rising 9.9% for the same period a year ago, due to the collapse of U.S. exports, which declined 12.5% in 2019 compared to 2018 growth of 8.5%.

That export slowdown itself took 1.3 percentage points off China’s GDP this year, according to Nomura.

“We have been leading the call on a growth slowdown since mid-2018, and we wish to maintain this lead by calling the recovery,” the Tokyo-based research firm said in a lengthy year-ahead look at China. “Unfortunately, we have to reiterate that the [worst] is not yet over and 2020 looks set to be yet another tough year.”

ispyfriend | E+ | Getty Images

Among the obstacles Nomura sees for China are a slowing real estate sector, less room for stimulus, particularly the credit easing that fueled a growth spurt in 2016-17, and continued issues with leverage.

“Amid worsening growth prospects, Beijing needs to do more to bolster growth,” Nomura economist Ting Lu and others wrote. “However, we recommend caution on the speed, scope and efficiency of Beijing’s stimulus measures, due to surging debt, including foreign debt, a much lower return on capital, the smaller current account surplus and falling FX reserves.”

The upside

Wall Street, though, thinks the issues in 2020 could be a turning point.

Looking further out on the timeline, there are plenty of reasons to expect that China’s drive toward No. 1 will have strong tailwinds, which will be propelled by amplifying what pushed the country’s growth over the past decade.

There’s a multi-faceted bull case for China that starts with the emergence of multiple “supercities.”

As the transition takes place, some 23 of these supercities will have populations greater than New York and five alone will combine to house 120 million people, according to projections by Morgan Stanley.

By bringing workers from the countrysides into the massive population centers, the supercities are aimed at arresting the drag that an aging population is putting on the broader Chinese economy

“We believe the answer to these challenges is a new phase of urbanization with the potential to create productivity gains by facilitating the freer movement of enterprises and workers while generating synergies between diverse industries,” Morgan Stanley economists said in a report.

Room for investing

China also is investing heavily in 5G technology as part of the modernization and urbanization efforts. The purpose is to get houses connected so that they are heavily automated, while students can use virtual reality learning to help with everything from online tutoring to homework.

As an investable situation, Morgan Stanley advises clients to look to technological infrastructure, the Internet of Things and software as one theme; digitalization of old-economy industries as another, and the supercities trends as a third, looking at smart appliances and vocational education among other innovations.

J.P. Morgan Chase advises clients to watch for a bottoming in industrial investment and cyclical trends and for improving momentum as 2020 progresses. The firm recommends a switch from defensives to cyclicals, in particular real estate, industrials and health care.

Goldman Sachs sees opportunity as well in pro-cyclical parts of the market as well as 5G-focused tech strategies and some leading consumer stocks.

But for Yoshikami, the Destination Wealth Management investor, the picture is still a bit cloudy as some of the more immediate issues remain largely unresolved.

“Investing in China is a dangerous game, because they are in between being an emerging market and a developed market,” he said. “I’m not sure the valuation is worth it at this point.”

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US Economy Ready to Surge With Stimulus, Expanding Vaccines – BNN

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(Bloomberg) — With Democrats on the verge of passing an almost $2 trillion stimulus bill and Covid-19 vaccinations moving ahead, the U.S. economic outlook is much sunnier than it looked in early January.

The latest Bloomberg monthly survey of economists shows the annualized pace of growth in the first quarter will be 4.8%, twice as fast as respondents expected just two months ago. For the full year, gross domestic product is projected to rise 5.5%, which would be the fastest since 1984 and is up from January’s estimate of 4.1%.

After January’s key run-off elections in Georgia, where Democrats secured two Senate seats to win slim control of the chamber from Republicans, economists were generally penciling in a pandemic relief package worth around $1 trillion. Democrats stuck together to push through a bill almost double that size; no Republican senators voted for the plan on Saturday. The plan next goes back to the House for a final vote.

An additional round of $1,400 stimulus checks for millions of Americans, combined with supplemental jobless benefits and the acceleration in vaccinations, should help sustain growth throughout the year, said Stephen Stanley, chief economist at Amherst Pierpont Securities LLC.

Government stimulus will “give a shot of adrenaline for a short period of time,” Stanley said. He noted that “it will kind of fade out, and the more fundamental aspect of things, which is really just opening up and getting back to something closer to the pre-pandemic norm for activity, should kick in.”

The Bloomberg survey of 67 economists was conducted Feb. 26 to March 3.

While economic growth is primed for a strong 2021, it could also mean another partisan divide over the next item on President Joe Biden’s legislative agenda: a multitrillion-dollar plan focusing on infrastructure.

What Bloomberg Economics Says…

Easing activity restrictions and rising vaccinations will allow consumer spending to regain its long-held status as the key economic engine this year. While another round of stimulus is set to push growth to its pre-pandemic trend by midyear, a stealth buildup of $1.7 trillion in extra savings means even more dry tinder for spending.

— Yelena Shulyatyeva and Andrew Husby, economists

For the full note, click here

Democrats hope the package could get bipartisan support, but Republicans — and possibly some moderate Democrats — are likely to be concerned about how the proposal would be funded, certain add-on provisions, and the size of the overall plan, especially if the economy shows sustained progress in the coming months.

U.S. Vaccines Pass 85 Million Doses

Recent reports have shown broad economic improvement in the U.S. Retail sales rose in January by the most in seven months, and a measure of U.S. manufacturing expanded at the fastest pace in three years in February.

The labor market, which has been slower to recover, showed a higher-than-expected employment gain in February, though jobs remain well below pre-pandemic levels.

Meanwhile, the daily rate of vaccinations has quadrupled and new coronavirus infections have plummeted since early January. Governors in Texas and Mississippi — despite criticism from health experts — announced plans to lift coronavirus-related restrictions entirely, citing a decline in hospitalizations and an increase in inoculations.

Getting the pandemic under control is still key to the economic recovery, “and then the checks, and the money — all this stuff will accelerate it really quickly once you’ve done that,” Heather Boushey, member of the White House Council of Economic Advisers, said in an interview.

©2021 Bloomberg L.P.

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Spike in Canada exports to U.S. leads to surprise January trade surplus

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exports

By Julie Gordon

OTTAWA (Reuters) – Canada‘s exports to the United States, its largest trading partner, rose sharply in January, leading to a surprise trade surplus, Statistics Canada said on Friday.

Canada‘s trade surplus with the rest of the world was C$1.41 billion ($1.11 billion) in January, the largest since July 2014. Analysts polled by Reuters had predicted a deficit of C$1.40 billion.

“In a sea of really bad news this is an island paradise. Everything is up,” said Peter Hall, chief economist at Export Development Canada.

“This is very strongly driven by our top trading partner,” Hall said, noting that demand from the United States will continue to be strong as its economy strengthens with increased vaccinations spurring a broader recovery from the COVID-19 pandemic.

The Canadian dollar clawed back some of its earlier decline after the data, trading 0.1% lower at 1.2678 to the greenback, or 78.88 U.S. cents.

Canada‘s exports jumped 8.1% in January, led by a large sale of used aircraft to the United States. Even without the atypical aircraft sale, aggregate exports would have been up, with strong exports of gold bars, crude oil and lumber.

Excluding the swings of 2020, exports posted their largest increase since August 1995.

“The return to surplus in January … is consistent with expectations that Canada‘s trade position will improve through 2021 amid returning global demand and firmer energy prices,” said Ryan Brecht, a senior economist at Action Economics.

Canada‘s export of services rose slightly on an increase in transportation services, but they still remain 16.3% below the February 2020 level.

Imports edged up 0.9% in January, mostly on higher imports of energy products. Canada‘s December trade deficit was revised to C$1.98 billion.

 

(Reporting by Julie Gordon in Ottawa, additional reporting by David Ljunggren and Dale Smith, Fergal Smith in Toronto; Editing by Paul Simao and Bill Berkrot)

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Lebanon's caretaker PM threatens to quit as economy plunges – DW (English)

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Demonstrators blocked roads after the Lebanese pound fell lower. As poverty and hunger spreads, pressure is mounting on politicians to form a new government.

Demonstrators blocked roadways nationwide for the fifth day in a row on Saturday and armed forces rushed to occupy parts of the capital Beirut as anger builds over the country’s economic downturn.

The Lebanese currency tumbled to a new low on Tuesday, enraging a population already suffering from the country’s financial meltdown.

With the crisis worsening, caretaker Prime Minister Hassan Diab threatened to stop performing his duties in a bid to pressure politicians to forge a new Cabinet.

Caretaker Prime Minister Hassan Diab gives a televised speech

Caretaker Prime Minister Hassan Diab warned of “chaos” if a new government isn’t formed soon

What did Diab say?

In his nationally televised speech on Saturday, Diab said he was prepared to suspend his caretaker duties “if it helps to form a government.”

“The country is confronted with enormous challenges that a normal government cannot face without political consensus,” said Diab. “So how can a caretaker government face these challenges?”

Diab warned Saturday against inaction and appealed to politicians to put aside differences and quickly form a new government that can attract desperately needed foreign assistance.

“What are you waiting for, more collapse? More suffering? Chaos?” Diab said, chiding senior politicians without naming them for continuing to debate over the future shape and size of the government.

“What will having one minister more or less [in the Cabinet] do if the entire country collapses,” he asked.

“Lebanon is in grave danger and the Lebanese are paying the price.”

What is happening to Lebanon’s economy?

Lebanon’s two year-long financial crisis shows no signs of ending as joblessness spreads along with hunger.

The collapse of the Lebanese pound, to 11,000 to the US dollar on Tuesday, was the last straw for citizens already suffering from steeply rising prices on consumer goods such as diapers and cereals.

The financial crash has also resulted in delays in the arrival of fuel shipments, leading to more extended power cuts around the country, which in some areas now are stretching more than 12 hours a day.

The crisis has driven nearly half the population of the small country of six million into poverty.

“Doesn’t the scramble for milk constitute a sufficient incentive to transcend formalities and roughen out the edges in order to form a government?” Diab said, referring to a recent Beirut supermarket incident in which shoppers fought over powdered milk.

The now viral video seemingly underscores the desperate state of the economy.

“Social conditions are aggravating, financial conditions are putting a severe strain on the country, political conditions are increasingly complex,” Diab added in his speech.

What can a new government do?

The nation has been drifting since August when Diab’s cabinet resigned following the massive Beirut port explosion that devastated much of the city.

Prime Minister-designate Saad al-Hariri was nominated in October but has failed to form a new Cabinet due to the political deadlock between him and President Michel Aoun.

Despite Lebanon’s need for foreign currency, international donors have said they will only help the country financially if major reforms are implemented to fight widespread corruption, which has brought the nation to the brink of bankruptcy.

A new Cabinet would be in a position to institute the necessary financial reforms.

mb/rs (AP, Reuters)

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