[China.com]Wang Jinbin: Where is the Source of the World’s Confidence in China’s Economy?

On April 9, the International Monetary Fund (IMF) issued the latest World Economic Outlook, revising downward the global economic prospects for 2019 to 3.3%, 0.2 percentage point lower than the forecast in January. The Outlook lowers the forecasted economic growth rate of such economic powers as the U.S., Euro area and Japan, but thinks China’s economy will have a good prospect and revise upward its forecasted economic growth rate for 2019 by 0.1 percentage point to 6.3%, making it the only economic power to be expected to see economic growth.

IMF’s World Economic Outlook presents its concern about global economic downtrend, and demonstrates its confidence in China’s economy that has stepped into the stage of new reform and opening-up. IMF listed basic factors that may influence global economic downtrend, including: trade tensions caused by external imbalance adjustment, aggravation of such tensions and increase of uncertainty of relevant policies; complexity of Brexit; financial difficulty and uncertainty of Italy; risk of volatility due to market’s quick reevaluation on American monetary policy stance and geo-political risk.  

All the factors will bring uncertainties to market investors and enterprises. Investors will reallocate risk assets, and their appetite for hedge securities will enlarge the interest margin between risk securities and risk-free securities, generate credit squeeze and cause financial conditions to tighten generally. In addition, continuous data on sluggish economy suggest that global economic growth will slow down for a prolonged period, which will further worsen the expectation of investors and enterprises and decrease the engines for growth.

It should be said that the Outlook fully discusses important factors for global economic downtrend. Naturally, discussions in the Outlook on some other important factors are insufficient. It’s worth noting that as President Trump keeps pressing the Federal Reserve recently, the independence of the Federal Reserve is questioned by the market, so that the market is increasingly uncertain about Federal Reserve’s policies, which may cause the financial market to be more volatile. Such situation is unfavorable for stabilizing investors’ expectation and cross-border capital flows. Trump’s intervention in Federal Reserve’s monetary policies will negatively impact global economic stability.

For American economy, from the perspective of aggregate demands, the marginal factors driving strong growth were consumption, investment growth and increase of government expenditure in 2018. However, the growth of marginal revenue mainly came from asset income, so income source instability determines that the marginal contribution of consumption will go down gradually; the tax reform plan stimulated the increase of enterprises’ investment, but current high investment growth rate will be hard to maintain; American government’s annual financial deficit has reached the level of USD trillions, which will limit the implementation of Trump administration’ plan to stimulate economy through financial approaches. Therefore, US economy is under the pressure of downtrend.

The extent of economic slowdown in Euro area is larger than market expectation, which is the result of joint action of multiple factors, including poorer sentiment of consumers and businesses; uncertainties of fiscal policies; Italian financial problems and negative impacts of various protests on French economy; and influences of investors’ concern about Brexit uncertainty on investment expenditure in Euro area.

Bad old practices die hard in Japanese economy. Debt and ageing population cause insufficient consumption and deflation, making Japan very hard to see a good economic growth rate.

The trade friction provoked by the Trump administration is the top uncertainty facing global economy, and aims in essence to reshape economic globalization in America's favor through de-globalization. Changes in global trade and investment limitation rules mirroring scarce technology trade may curtail and hinder technology trade and technological diffusion, which is unfavorable for the long-term development of global economy. The trade friction changes the global trade and investment patterns that have worked for decades in the past, and will make profoundly negative impacts on the world economy and prolong the period of mediocre economic growth, which is also the core reason why IMF revised downward global economic growth rate for 2019.

Contrarily, IMF revised upward China’s economic growth rate for 2019, as China learns from the trade friction that it is necessary to balance internal and external drivers to economic development, so that China will further enhance reform and opening up efforts and introduce more market competitions to stimulate market vitality.

To address problems in economic development over the past years, China has drafted medium and long-term plans for supply-side reform. In the short run, China adopts flexible fiscal policies to lessen burdens on enterprises on a large scale, strengthen points of weakness in economy and stimulate new growth sources, gradually releasing new economic growth drivers. In terms of monetary policies, the focus is on tracking exchange rate volatility and offering normal market fluidity, to promote the stability and development of the financial market and ensure that no systemic risks will emerge on the basis of keeping moderate leverage ratio. With such well-mixed policy combination, China’s economy is expected to maintain a relatively stable growth.

Wang Jinbin, research fellow of the National Academy of Development and Strategy and Executive Deputy Secretary and Deputy Dean of the School of Economics, RUC

The original article was published here.