Resilience amid headwinds

Although the recent Sino-US trade deal surely deserves praise, 2020 is still likely to be marked by challenges and uncertainties. Indeed, the reconciliatory gesture between the two largest economies hardly changes the grim fact that the world trade and economy are suffering from high risks, weak fundamentals, and, to quote Managing Director of the International Monetary Fund Kristalina Georgiev, a "synchronized slowdown".

The new head of the IMF painted a gloomy picture for not only advanced economies but also emerging markets. The developed economies have long been struggling with the challenge of huge public debts and aging populations, among many other structural problems. While the developing countries, especially India, Brazil and Russia, are plagued by their lack of innovation and fragile banking sectors. Moreover, it is rather likely that the rising populism and anti-globalization movements, which are both mainly triggered by severe economic inequality, might maintain their popularity and pose threats to the social stability of the countries in question. Overall, in this context, strengthening the resilience of the economic and financial system should top the policy agenda of world leaders.

Looking at China. Generally speaking, in the past two years, as its structural transformations have continued in parallel with the trade conflicts, economic growth in China has further slowed down-a trend started around 2010. Notably, a bitter debate over recent days is whether the annual GDP growth rate can reach 6 percent or above in the coming year. Besides the ongoing tensions with the United States, China's further opening-up has also been encountering headwinds from other sources.

In particular, as the country is increasingly blamed for its economic, monetary, technological and even cultural ambitions, it seems that the "established powers" have not yet come to terms with the sweeping changes brought about by the rise of the Asian giant. As a result, nowadays China's overseas investments, as well as international technological, academic and cultural collaborations and exchanges along are all facing new challenges.

Fortunately, a bright spot is that to a large extent, China's economy appears to be resilient in response to internal and external shocks. As regards the financial landscape: thanks to a series of deleveraging measures and banking regulations, the growing debt leverage in corporate and banking sectors (measured as sectoral debts scaled by GDP) have stopped climbing since early 2017; in the meantime, the housing market regulations produce, in general, expected outcomes and importantly, the belief in ever-rising housing prices, especially in first－and second-tier cities, is fading.

The real economy also shows signs of resilience. Despite the economic slowdown, the monthly survey-based unemployment rate in urban areas stays around 5 percent since it was first introduced in early 2018, also suggesting a rather healthy, or at least stable, labor market; fight against absolute poverty continues to gain grounds, and it is expected that no one will live below the official poverty line by the end of this year.

Moreover, unlike most of the developed countries, the central government in China possesses a strong, if not enviable, financial capacity to address cyclical shocks if needed; the two-pillar regulatory framework, which combines traditional monetary policies and macro prudential regulations, is playing an increasingly important role in maintaining macroeconomic stabilization.

That being said, it is absolutely the right time to heed US economist Hyman Minsky's famous warning that "stability is destabilizing". Indeed, as history generously teaches us, a number of variables, such as asset prices and financial ratios, often behave pro-cyclically so that their instability is hidden when everything is going fine. Thus, it should be kept firmly in mind that the apparent resilience of China's economy is not without concerns. From the inside, despite the deleveraging policy, China's economy is still flawed by the disconnect between the real economy and finance.

Undoubtedly, this structural problem not only hampers innovation and entrepreneurial activities, but also gives incentives to risk-taking behavior. From the outside, one should not expect too much from external demand to boost China's slowing economy, nor technological spillover from the advanced countries to upgrade China's industrial system. At this point, it also seems reasonable to conjecture that the Sino-US trade talks in the next phase will be as hard (if not harder than) they were.

Therefore, China would substantially benefit from making more room for economic resilience. To this end, three key efforts are needed.

The first is to continue stabilizing the overall financial leverage despite the gloomy growth prospect. A major difficulty in this regard lies in the financial sustainability of borrowings for, sometimes underused, infrastructure constructions. It is not uncommon that those projects are financially backed or guaranteed by local governments and State-owned banks, and thus contagion risks across sectors need to be attentively monitored.

The second is to further boost domestic demand and thus reduce the dependence on exports on the demand side of the national economy. More attention needs to be paid to foster an institutional environment in favor of family consumption, such as better enforcing consumer protections rules, and improving the social security system. In particular, the underdevelopment of the latter is often invoked for explaining the slack consumption of China's households due to precautionary motives.

The third is to reinforce the resilience in the face of external technological shocks through encouraging indigenous innovations. To achieve this goal, key policy focuses include better protecting intellectual property, promoting private entrepreneurship, and allowing more autonomy to public institutes and universities which undertake research and development.

To conclude, although 2020 is likely to be rocky, there is still reason for optimism as long as China can bolster its capacity to absorb shocks and ability to bounce back.

The author is associate researcher at Institute of Economics at Chinese Academy of Social Sciences and senior researcher at National Institution for Finance and Development.

The author contributed this article to China Watch exclusively. The views expressed do not necessarily reflect those of China Watch.

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