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Chinese Economy Faces Dangerous Challenges

China's decision to abandon its goal of economic growth by 2020 for the first time in history is not surprising, but it is also a reminder of the dangerous situation that the economy is large.

The national economy fell 6.8% in the first quarter and will bring the Chinese economy into the first recession since the end of the Cultural Revolution in 1976.

Carlos Casanova, Asia-Pacific economist at insurer Coface, said it still expects 1% growth this year and cannot rule out negative growth for the whole year if there is a another covid-19 outbreak in the fall or in the event of a deeper global economic recession.

Any recovery this year will depend on no more virus outbreaks, no more closure and stimulus measures announced at the National People's Congress (NPC).

Alicia Garcia Herrero, Asian chief economist at Natixis, said China had shown that it had to devote a lot, even to develop a little. But for the most part, economists have agreed that China should focus on more realistic and tangible areas such as jobs, at a time when Beijing is facing an unemployment crisis.

Peking University professor of finance Michael Pettis said the decision to abandon the growth target is good news for China if it represents a real change in economic policy, and signals that it will focus on sustainable demand, consumption and investment in the private sector to drive growth.

Shao Yu, chief economist at Oriental Securities Company in Shanghai, said giving up the growth target of gross domestic product was a realistic move, in line with public opinion in the context of a century challenge presented by COVID-19.

However, moving from a top-down growth strategy may present some challenges for local governments, which are difficult to pursue growth targets.

Deng Feng, a professor at Peking University Law School, added that eliminating the growth target will not prevent provinces from competing. The Chinese political system is like a tournament where there is always competition between local officials. 

Even without a GDP target this year, a province still wants to surpass its GDP competitors, which rely heavily on infrastructure construction.

Analysts from the Economic Intelligence Unit pointed out that Prime Minister Li Keqiang mentioned a total of 38 jobs in his speech to the NPC, in a sign that Beijing was worried about the situation and how the job looks like.

China will try to maintain the unemployment rate surveyed at 6.0% for 2020, which will be a significant challenge, given the fact that it reached a record high of 6.2% in February and at 6.0% in April. Some analysts have estimated that the real unemployment in China could rise as high as 20%, which also helps explain the direct relationship on stimulus economy.

Julian Evans-Pritchard, China analyst at Capital Economics, said that the annual budget indicates fiscal stimulus this year at least on par with the global financial crisis, and while monetary policy may remain even more restrictive than in 2009, NPC signaled further reductions and faster credit growth.

However, unlike the global financial crisis a decade ago, the covid-19 pandemic had many economic risks that could not be clearly identified. China may overcome some of these issues, but others remain out of control.

Louis Kuijs, an analyst at Oxford Economics, said they had predicted the absence of this year's gross domestic product growth target, asserting that policy makers accepted after a slump in the quarter. First, economic growth will be low in 2020 even after a significant sequential recovery from the second quarter to the fourth quarter.

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