With the global economy enduring a tough year following widespread pandemic-related shutdowns, China’s growth has never been more important. The AmCham China Quarterly spoke to Steve Barnett, Senior Resident Representative for China at the IMF, to get his thoughts on the recovery, policies to watch for in 2021, and looming risks to avoid.
You’ve spent the last 10 years covering Asia, with several of those years in China. What have been the major changes you’ve witnessed in that decade or so, and what are you expecting to see over the coming years?
Steve Barnett: I always think that the success that China has had economically over the last three decades really has been the ability of structural reforms to generate productivity growth. I think what always surprises me is just how fast it has developed. We moved here for the first time in 2003, and if I compare the city today, even in Beijing, the place where we’re living downtown didn’t exist back then. I just went to Shenzhen and I hadn’t been there since about 2005. Just to see the development, and how fast and how much things change and modernize is really amazing.
Going forward, any future success will depend on the same thing – the government’s continued ability to undertake reforms that can lead to sustainable growth. We’ve had three decades here, averaging nearly 10% growth. We don’t expect those kind of growth rates to continue – we forecast growth over the next five years at somewhere between 5% and 6% – and that is natural as an economy matures and income levels catch up to other countries. But growing at 5% or 6% is still a lot of growth. However, we look not just at the rate of growth, but also how that growth is generated. And, since the Global Financial Crisis, growth has relied considerably on capital deepening.
As you point out, the country’s economic base is now far larger than it was, so we’re still seeing huge growth, even if the growth rate is smaller. But are China’s growth targets set at realistic levels and what can China do to maintain that growth into the future?
Steve Barnett: The key really is to boost productivity. Roughly speaking, growth comes from three things: you can add labor, you can add capital, or you can use your labor and capital better, which is what we call total factor productivity. A lot of China’s success and rapid growth, especially in the early 2000s, was through productivity, or what I like to think of as from farm to factory. You took workers from the farms, who were really engaging almost in subsistence farming, and you moved them into factories and the productivity went way up. We had the SOE reforms in the late 90s, and China joined the WTO in the early 2000s, and those things both worked really well. That productivity, in turn, was actually fueled by structural reforms, or what the authorities might call high-quality growth.
You’ve talked in the past about moving towards this “high-quality growth”. What does that involve exactly and what does China need to do to get there?
Steve Barnett: Since the global financial crisis, we had growth that relied heavily on capital accumulation – adding more and more capital. So one aspect of higher quality growth on the supply side would be switching to productivity, which requires reforms, such as modernizing the monetary policy framework to rely more on interest rates, modernizing the fiscal policy framework, and continued reform and opening up to the financial system. You can think of the financial system as a way to allocate credit, so we’re looking for ways to ensure that credit can flow to the most productive uses. Another one would be continued SOE reform to ensure a level playing field between the private sector and the SOEs, which is often called competitive neutrality. That’s all from the macro aspect. There are also other aspects of high quality growth, like eradicating poverty, improving people’s livelihood, ensuring stable employment, and continued strengthening of the social safety net, but the macro economist in me would really look for reforms that boost productivity. Of course, there are also measures to help with high-quality growth on the demand side. Our forthcoming Article IV report – our annual report on China – will be discussing some of this.
Compared to other countries around the world, China has had a fairly quick economic recovery, especially with regard to manufacturing. What sectors do you see coming back to some kind of normality, or pre-COVID levels, in 2021?
Steve Barnett: The managing director of the IMF has been advocating globally that, as we recover from the pandemic, policymakers need to think not about rebuilding the economy of yesterday, but how to build the economy of the future. It’s likely that some sectors could be permanently smaller, while others could be permanently larger. Anything related to digital transformation, fintech, or online ordering are probably set to grow, while sectors that rely much more on contact, such as tourism, could shrink. But at the IMF, we’re not looking to pick winners and losers, as much as ensuring that policymakers are alert to what changes could be happening. One challenge is to facilitate these adjustments, but in an orderly way that still lets the market make these decisions.
China is coming out of the pandemic much quicker than the rest of the world and in fact is the only major economy where we expect positive growth this year. China already had a fairly developed fintech industry, and online services, but those are the type of sectors that we think could continue to see good growth. Tourism is interesting. If you look at China’s balance of payments, they have more outbound tourism than inbound. So, at a time when global tourism is low, if Chinese people keep spending the same amount on tourism, but have to spend it locally instead, that could actually be a net increase for tourism in China.
Different countries have had such different responses to the pandemic, not least in how they weigh up the twin issues of public health and economic prospects. How does the IMF advise countries on something like this, given that this equation is different all over the world?
Steve Barnett: At the IMF, we tailor our advice to specific country circumstances. Having said that, we have been quite clear that, in order for the economy to get going again, it’s really important to get the pandemic under control, and China is a good example of that. But we really avoid a one-size-fits-all solution, and tailor our advice to specific country circumstances.
China didn’t issue a growth target for this year. Do you expect China to return to issuing GDP growth targets in the future? What do you look at to cross reference the government-issued numbers?
Steve Barnett: We do our independent forecasts, based on what developments we see happening in the economy, what the underlying momentum is, what’s happening with trading partners, because that would have implications for exports, and so on. But, of course, we also look at the growth target, because we need to factor in if macroeconomic policy is being calibrated to achieve a certain growth target. We will see in the next government Work Report if there’s a growth target, but a lot of the things that were mentioned in this year’s report focused on high quality growth, people’s livelihoods, and creating jobs, and those are probably the right metrics to look at rather than aiming for a specific growth target.
One challenge for 2021 is that the consensus forecast is for growth of around 8% for next year. But it could be tough to communicate that it will be around 2% for this year, around 8% next year, and then resuming at around 5.5% to 6% in 2022. As an economist, it’s easy to understand the base effects that Q1 of last year was weak, so next year in Q1 is going to be big. But it’s not so easy for the average person on the street to understand that growth could can go from 2% to 8%, even though the underlying growth momentum remains the same.
There was quite a lot of talk earlier in the year about Chinese stimulus, such as what we saw in 2008, but it never materialized as many had expected. Are you expecting to see stimulus plans launched in 2021 and beyond?
Steve Barnett: Our advice for the global economy is not to withdraw macroeconomic policy support too early in order to ensure that the recovery is secured, and that advice also applies to China. We advise keeping fiscal policy moderately supportive next year, and to keep monetary policy accommodative. We’ll have to wait to see what policies are put in place. Our forecasts are based on established policies – ones that are already in place or already announced.
How effective is China’s dual circulation policy? Does it update its previous plan to rebalance the economy, and do you see it been the right solution for China at the current time?
Steve Barnett: We need to see more details about what it actually entails, but I tend to view it as a continuation of policies that we’ve seen to rely more on domestic demand. To the extent that it focuses on boosting consumption in China, and rebalancing the economy, then I think that would be good for China and good for the global economy. This rebalancing towards an economy where consumption plays a much larger role is something that the IMF has been advocating for a long time. I also think it’s very clear that dual circulation does not mean they’re going to close to foreigners. In fact, I think President Xi’s statements have been quite clear that they will continue with the reform and opening up and that the external circulation will also continue. But, in terms of the actual details, we will have to wait to see specifically what policies underlie this total circulation.
AmCham China has long advocated for a more reciprocal relationship between the US and China, in terms of how foreign companies are treated here and vice versa, believing that this would benefit not just the companies, but the wider Chinese economy as a whole. What’s your view on this, and how does the IMF tread the line between advocating for what it sees as positive and avoiding some of the more political sensitivities surrounding these areas?
Steve Barnett: We have been big advocates of global trade. If we look back over the last couple of decades, rising global trade has been a really important engine of global growth. And the IMF has been a consistent and strong advocate of a transparent, open, and rules-based multilateral trading system. Some of that is the purview of the WTO, but we would like to see a strengthening of this trade system.
When the trade tensions between the US and China started to rise, we had put out quite a bit of analytical work that just underscored the point that nobody wins from these trade tensions in the economic sense that output is lower, and the costs are higher. So, it goes without saying we’d much rather see a world without trade tensions and where trade can come back to being an important driver of global growth. A common line we use is that we focus on policies, and not on the policy makers. Our assessment would be always be an assessment of what policies we think are appropriate for the time. As an economic institution, promoting global economic and financial stability, we’re very much focused on those policies.
What are the biggest financial risks looming on the horizon for China that you will be keeping your eyes on in 2021, both from within and outside its borders?
Steve Barnett: I think the biggest risks are related to the pandemic, whether there is a reoccurrence here, or even globally, if it means a worse economic impact that has spillovers on China. With all the news on vaccines lately, it’s a bit more optimistic on that front, but I think I would still put that as the number one risk. Then, as alluded to earlier, there’s always the potential for geopolitical tensions, and how those could spill over into the economic arena.
The third risk for China, which is more of a financial risk and similar to what we’re seeing in the global economy, is as part of the support for the economy this year, we saw an increase in the deficit and corporate debt, not least due to policies to support credit growth. The stock of corporate debt in China is fairly high, with policymakers looking to de-risk or de-lever once the recovery is secured. So, we’re looking forward to finding the right balance between providing near term support to ensure the recovery is secured and then over the medium term moving to reducing risk from high corporate debt and fiscal consolidation to ensure that that government debt is at comfortable levels.
This article appears in Issue 4 of the AmCham China Quarterly Magazine, which you can read here.