By Yasmine Nina Benhalima
Founder, host and writer
China’s economic and leadership history
After Mao Zedong’s death in 1976, Deng Xiaoping became China’s paramount leader and pushed ahead bold reforms that reshaped the country’s economic growth. The Four modernisation – agriculture, defence, industry, science and technology – marked the beginning of opening-up policies. Those reforms opened China to foreign investments, encouraged entrepreneurship, boosted the role of market mechanisms and reduced government control over the economy.
The Special Economic Zones were introduced, they refer to several localities in which foreign and domestic trade and investment are conducted without the authorisation of the Chinese central government in Beijing. The objective was to promote rapid economic growth by using tax and business incentives to attract foreign investors and technology. In 1980, China joined the International Monetary Fund and the World Bank which emphasised China’s openness to the world.
In the early 1990s, Jiang Zemin became the new leader of the country. Under his mandate, most of the state-owned companies were privatized or liquidated, thus expanding the role of the private sector in the economy. In addition, Jiang guided China to join the World Trade Organisation in December 2001.
The fourth generation of leadership was led by President Jintato. Under his administration, China’s economic growth skyrocketed, the country increased subsidies, scrapped agricultural taxes, slowed privatization and promoted social welfare. The US 2008 global financial crisis forced the Chinese authorities to launch an aggressive stimulus package and to adopt ultra-accommodative policies that helped the country recover faster than other emerging countries.
China’s economy post-COVID19
The Covid19 outbreak started in the province of Wuhan in November 2020. In two years, the pandemic has swept the entire globe and caused over 250 million infections and over 4 million deaths. The country faced a historic decline in growth of at least 6 % in 2020. Yet, in 2021, the country has registered a robust recovery and economic growth is projected to reach 8.5 % by the end of 2021. The country has been able to develop effective vaccine campaigns and developed medical equipment that helped the country recover quickly.
However, some fragilities over China’s macroeconomic structure emerged after the Evergrande crisis. Founded in 1996, Evergrande owns more than 1300 projects in 280 cities, after a liquidity scare in 2020, the company reported a cut plan of $100 billion debt. In December 2021, Evergrande faced a succession of payment failures and missed its deadline to pay two coupon bonds, the main bondholders included BlackRock, UBS Group AG and Allianz SE. On December 6th, China Evergrande Group has been declared by Fitch Ratings to be in default on its debt.
What does this crisis tell us about the Chinese economy?
This crisis reveals the fragilities of the Chinese economy and calls for a need to reform its macroeconomic structures, the quality of its output, the resource allocations and boost consumption. It is also worth pointing out that the downward of the sector is also due to China’s demographics, declining fertility and marriage rate and slower urbanisation that has levelled out the housing market. Therefore, the issue is not Evergrande’s case per se, but more the economic model of China.
2022 and beyond
China’s green growth:
China has made good progress in achieving the climate goals. At the international level, the US-China Glasgow joint agreement reiterated the country’s commitment to reduce its carbon footprint. At the national level, China needs to implement market reforms in the power sector that incentivise power producers to adjust their production and investments in order to meet climate goals.
Consumption boost:
China needs to boost household consumption and make growth more inclusive. To do so, the country needs to strengthen its social protection program to reduce the need to insure against individual risks through precautionary savings.
China’s foreign policy:
The most difficult challenge is the US-China relationship as the Taiwan issue remains a source of concern for both countries. This crisis refers to the controversy related to the political status of Taiwan and is the result of the Chinese civil war. This brings to the One-China principle which is the idea that mainland China and Taiwan are both part of China and the question being asked under the Biden administration is how the US can support Taiwan the One-China policy.
The World Bank has set China’s economic growth to 5.1 %, a much slower pace than China averaged in previous decades. The Beijing Olympics in February will stimulate the economy and the rise of new industries such as industrial robots will continue to provide growth opportunities. However, the Chinese economy still has fragilities such as the real estate crisis and the diplomatic tensions with the United States that need to be addressed in order for the economy to remain solid in 2022.
