Outlook on the Global Economy and Chinese Economy in the Post-COVID Era

 

The AsiaGlobal Dialogue 2022 was held on 16 November 2022 at the University of Hong Kong, gathering economists, scholars, and government leaders from around the world to exchange insights on the topic of “Recovery and Reform: Asia in the Changing Global Economy”.

In a panel discussion on “Taking Stock: Assessing the Direction of the Global Economy”, Dr. Fred Hu, founder of Primavera Capital; Michael Spence, Nobel Laureate in Economics; Julia Leung, CEO of the Hong Kong Securities and Futures Commission (HKSFC); and Terry Lundgren, founder and CEO of TJL Consulting, discussed recently highly topical issues including the global and Chinese economic trajectory in the post-COVID era, the global green transition and road to sustainability, and evolving models of globalization. The panel discussion was moderated by Heiwai Tang, director of Asia Global Institute and APEC Study Center and professor at HKU Business School.

Over the past few years, the global financial market faced significant challenges almost simultaneously, including the COVID-19 pandemic, the Russia-Ukraine War, rising inflation, supply-chain disruption, the energy crisis and intensified food security concerns.

Specifically, amid the pandemic outbreak and geopolitical volatility, global inflation continued to rise, with increasing interest rates leading to rapid currency depreciation in certain developed economies and clear capital outflows from certain emerging markets. At the same time, stresses on the global supply chain have ushered the world economy into a state of restricted supply.

Despite these tremendous challenges, the panellists expressed hope for the future and stated their  strong faith in the power of change.

 

China’s Economic Outlook in the Post-COVID Era

Regarding the economic outlook, Fred Hu expressed an optimistic view on China’s mid to long-term development on two conditions: firstly, the change of its Zero-COVID policy; secondly, with the 20^th Party Congress in the rear mirror, the Chinese government shifts to focus on structural reforms and economic development.

Fred said that initially, China’s Zero-COVID policy played a critical role in significantly minimizing fatalities. However, as the virus evolved, the cost of such a strategy began to mount and created a huge burden on the economy and local finances. Fred was positive about China’s post-COVID economic recovery, believing that after the pandemic policy U-turn, China’s economy will show a strong rebound, first in the consumer and service sectors, followed by manufacturing.

“With the 20^th Party Congress successfully completed, the leadership is obviously switching gears,” said Fred, with key focus areas being to push for economic recovery through sustainable growth and to continue encouraging entrepreneurial innovation. Many technology sectors have not been affected by regulatory policies in the past few years and have been undergoing rapid innovation. With a steady pool of tech talent and the robust development of capital and equity markets, conditions for China’s continued technological innovation are sound.

“China’s entrepreneurs are probably some of the most dynamic, resilient, and innovative ones on the planet. All the government needs to do is to create conditions for the private economy’s comeback,” said Fred.

He also believed that China’s financial system, especially the banking system, will not be seriously impacted by the woes of the real estate sector. Large banks are very well capitalized, with good asset quality, thus their risk exposure is in fact much smaller than generally expected.

Meanwhile, he acknowledged that the government should better communicate with the market and carry out smarter and more transparent oversight, as “[policy] communication has become a big challenge for the rise of China.”

 

Geopolitics: Globalization not dead yet

On the topic of geopolitics, Julia Leung opined that globalization is not over. She said financial institutions have done many stress tests and contingency plans for the various geopolitical risks they are facing. She also commented that the benefits of capital market consolidation are so big that it’s difficult for governments to ignore them. “When other countries are able to share the profits driven by China’s growth, decoupling becomes a painful matter for them,” she said.

Citing Tesla’s Shanghai mega factory as an example, Fred said that it’s easy to talk about decoupling and supply chain diversification, but people often forget about the time and costs associated with achieving such goals. Supply chain diversification driven by politics creates an inefficient lose-lose outcome.

Terry Lundgren agreed that globalization has not disappeared from many service and trade sectors – commodity prices will remain stable and are unlikely to cause significant inflation. Regarding the issue of American political polarization, Lundgren pointed out that the midterm election results demonstrated that American voters have had enough of extremism and Gen Zs have decided to speak up, both of which will have a sway on bipartisan policies.

Meanwhile, Michael Spence said America is using its dominant status in the global financial system to leverage financial tools as weapons against Russia, which has caused huge concern among Asia and other emerging countries. The American government has severely underestimated the consequences of such financial weaponization measures.

 

Important reforms that change the future

Despite numerous challenges, there are still many bright spots in the global economy. According to Michael Spence, in the global context, the weight of the world economy is shifting towards emerging economies, and the “thriving development of the new middle-income consumer population” must not be overlooked. At the same time, innovation is expanding from America and Europe to China, India and Southeast Asia, even to Latin America and Africa.

“We need a new way of thinking to come up with macroeconomic policies, and we need a new way to evaluate the global interdependent relationship,” Michael Spence believed that the multi-dimensional digitization of the economy, the revolution of biomedical and life sciences sectors, and energy transition are the three most important changes the world will face in the future – there is no reason for countries not to collaborate, especially on the latter two.

 

Fred commented that China’s status as the world’s second-largest economy meant that it would play an instrumental role in the energy transition. China has been the world’s largest renewable energy investor, with the potential to become a world leader in clean energy technology. In the past decade, China’s investment in this area has exceeded the combined total investments by the US, Japan, Germany, France and the UK. Of every 2 electric vehicles sold in the world, over 1.2 is sold in China. As for batteries and associated raw materials, China accounts for 75-90% of the global supply chain.

Nevertheless, China must collaborate with other countries to maximize its technologies in renewable energy, carbon capturing, and electrification in order to push for global net zero. Fred believed that “China will promote global development, reduce poverty, and help create a cleaner, greener, and more sustainable future.”