China enters 2021 in good shape but faces headwinds | NRS-Import | DW | 01.01.2021

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NRS-Import

China enters 2021 in good shape but faces headwinds

China starts the year as the only major economy that is growing, but DW China analyst Clifford Coonan says that the weak global economy and trade conflicts will provide big challenges in 2021.

As 2021 arrives and the world slowly emerges from a pandemic that has shattered the global economy, China is in pretty good shape. It is now the only major economy that is growing. And with its post-COVID-19 recovery mostly in the bag, Beijing is looking forward to the new year with optimism.

The rating agency Fitch revised up its estimate for China's 2021 GDP growth to 8% and others are also bullish.

For all this, many of the headwinds China faced in 2020 will continue into 2021. The country's domestic economy is strong, but it needs overseas markets to sell its goods.

Despite just having signed a major investment deal with the European Union, China still needs better relations with the US to get technology for its products. The crackdown on democracy in Hong Kong, forced labor in Xinjiang and global anger over its initial mishandling of the pandemic, have blighted China's image.

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Communist Party marks its centenary

Anniversaries are a major element in the Chinese political calendar, and the ruling Communist Party will mark its 100th anniversary in 2021. Throughout the year Beijing will be awash with red flags.

Chinese anniversaries highlight how the political and the economic worlds are inextricably linked. To mark the anniversary, Party Chairman Xi Jinping, who is also president and head of the military, will seek more state control of the economy.

University of Oxford China Centre associate George Magnus told DW that he expects 2021 will see China "embracing pandemic recovery, ensuring macroeconomic stability and happiness as a backdrop for the Chinese Communist Party's centenary."

A renewed focus on dual circulation

Dual circulation is Xi's strategy for the next phase of economic development, built on "domestic circulation" — the internal cycle of production, distribution and consumption, while promoting innovation and upgrades in the economy.

Experts read the policy as a sign China is trying to reduce its interaction with the outside world.

Ho-Fung Hung, a professor of political economy at Johns Hopkins University, believes China is going to have to balance its internal circulation and global engagement.

"The recent surge in exports is likely to be short term and China will face more pushback in the longer term when Western economies and their demand are struggling to recover in 2021," he told DW.

Another of Xi's pet projects, the Belt and Road initiative, is seeing a funding squeeze. Beijing is also pulling lending to high-profile projects in developing countries. A database from Boston University cited by the Financial Times showed lending by two of China's biggest development banks, China Development Bank and Export-Import Bank of China, had effectively collapsed, plummeting from $75 billion (€61.6 billion) in 2016 to $4 billion in 2019.

A focus on demand-side reform

Another buzz phrase from recent Politburo meetings and economic work group gatherings is demand-side reform.

"Demand-side reform is potentially a real game changer for consumption and inequalities, if Beijing is prepared to bite the bullet on political and institutional reforms. I'm a sceptic, as are many," said Magnus.

The cover of the second volume of Xi Jinping's book 'The Governance of China'

The answers may be within the covers of the second volume of Xi Jinping's book 'The Governance of China'

A big proponent of demand-side reform is Liu He, the Harvard-educated vice premier and Xi's key adviser, who led the Chinese delegation to the US-China trade talks. Expect to see more of him this year.

"Liu He now controls China's economic policy," Houze Song, a research fellow at the Paulson Institute, told Bloomberg news agency. "Financial de-risking will probably be back on the agenda."

Pressure on Big Tech and debts

This outpouring of Marxist-Leninist zeal is bad news for China's super-sized tech firms. China's antitrust watchdog published draft rules aimed squarely at stopping anticompetitive behavior by the tech titans and the Politburo says it will clamp down on the "reckless expansion of big capital."

It's happening already. In November, market regulators nixed the planned share sale of Jack Ma's Ant Group days before what could have been the world's largest initial public offering (IPO). Ma, the country's richest man, had his wings clipped.

The Communist Party stresses stability in every area of life in China, it's the key to their continued rule. Massive debt is destabilizing — China's debt ratio surged to a record level in 2020 to around 280% of GDP. The challenge now will be balancing stability against the need to reform bloated state-owned enterprises and deal with over leveraging.

A focus on free trade

In 2020, China signed up to a mammoth free trade pact, the Regional Comprehensive Economic Partnership (RCEP), where Xi hailed China as a champion of free trade policies and the "forerunner in driving global growth."

He went further, saying he wanted China to join the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP).

Chinese President Xi Jinping discussing the EU-China investment deal with European leaders in December 2020

Chinese President Xi Jinping discussing the EU-China investment deal with European leaders in December 2020

China likes to talk free trade, but there are concerns — with the ink barely dry on the RCEP deal, China introduced a raft of tariffs on Australian products amid calls from Canberra to investigate the origins of the coronavirus. With an EU-China investment deal announced in December, European leaders make little mention of what is happening to Australia. Expect fallout from China's approach to Australia in 2021.

What will Joe Biden do?

The EU-China trade pact is seen by some as an attempt at gaining advantage over Joe Biden before he comes to office, pitting allies against each other after relations became strained during Donald Trump's time in the White House.

The relationship between the world's two biggest economies has enormous implications for the rest of the world. So it's no surprise that there is a high degree of wait-and-see about the incoming government.

While China has the most complete manufacturing supply chains in the world, trade tensions with the US have shown this is vulnerable because it is heavily reliant on American high-tech products like semiconductors.

"Assuming the Biden administration does pull off stronger engagement with its traditional allies in Indo-Pacific and Europe, China will find it more challenging and lose some bargaining advantage with other countries than under Trump," said Hung.

The current thinking is that Biden will try and repair international relationships, especially on trade. The question is whether he will return to the earlier soft approach or if he will keep up pressure on China.

The Hong Kong headache

Finally, Beijing's crackdown on press freedom and the independent legal system with its controversial national security law has undermined Hong Kong's reputation as an international financial center.

Still Hong Kong is expected to have about 120 to 130 initial public offerings next year, raising more than €42 billion and likely exceeding the record level of 2010. But a lot of those IPOs are from China itself.

"Hong Kong is another matter. China still couldn't find a replacement for Hong Kong as an offshore financial center," said Hung.

"The national security law did stop the unrest, but its financial and economic repercussions could start to emerge in 2021," he added. "Beijing is still not sure whether it could control the elite in the city."

As 2021 arrives leaders in Beijing and around the world have a lot on their plates. So far China seems to be ahead of the pack with its economic growth and has earned the right to look forward to the new year with optimism.

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