China back in global growth driver’s seat

beijingwalker · Apr 6, 2023

China back in global growth driver’s seat

ADB expects China’s reopening to propel regional growth in 2023 but oil price shocks and slow Chinese reforms could pinprick the projection
By WILLIAM PESEKAPRIL 5, 2023

China's economy is picking up steam after its 'zero-Covid' debacle. Image: Twitter

In the Xi Jinping era, China has struggled to balance how its economic ambitions play beyond its borders. What may look like savvy reform plans in Beijing can easily get lost in translation abroad.
Case in point: Communist Party leader Xi is assuming even greater control over China Inc even as insiders argue new Premier Li Qiang is about to fundamentally reform the nation’s economic model.
Yet the Asian Development Bank’s (ADB) latest growth outlook reminds Xi of China’s best hope of bridging the perception gap: being the economic engine the region desperately needs in 2023.

Weekend news from petroleum exporting nations darkened Asia’s growth prospects. The move by OPEC+ nations — including Russia — to cut production by roughly 1.2 million barrels per day could not be more perilously timed for export-reliant nations struggling amid global inflation.

The ADB’s view that Asia and the Pacific will grow by 4.8% in 2023 and 2024, up from an earlier 4.2%, thanks to China’s post-Covid recovery offers powerful counter-programming. It puts China in the position of “main factor” driving growth at a pivotal moment for the region.

“Prospects for economies in Asia and the Pacific are brighter and they’re poised for a strong recovery as we return to normalization following the pandemic,” says ADB chief economist Albert Park.

That, Park says, will reinvigorate consumption, tourism and investment in a region traumatized by three-plus years of Covid-related chaos.

It helps, too, that India is set to outpace China’s gross domestic product (GDP). The ADB sees Prime Minister Narendra Modi’s economy growing at least 6.4% this year versus 5% for China.

“People are starting to travel again for leisure and work, and economic activities are gathering pace,” Park notes. “Because many challenges remain, governments in the region need to stay focused on policies that support stronger cooperation and integration to promote trade, investment, productivity and resilience.”

Especially China, which the ADB sees slowing to 4.5% in 2024.

The onus is on Premier Li’s team both to hasten GDP and make the most of that growth, focusing more on the quality of GDP than the quantity. That would increase China’s ability to spread the benefits of accelerating GDP at home and its regional firepower in ways that endear Xi’s nation to Asian neighbors.

This will owe much to Li’s team putting some big supply-side reform wins on the scoreboard in short order. Priorities include taking Beijing’s foot off the neck of internet entrepreneurs, increasing productivity, prodding households to save less and spend more, and making China’s semiconductor industry more self-sufficient amid US trade tensions.

Recent news at Alibaba Group puts some wind in Li’s sails.

Since Jack Ma was effectively disappeared from China Inc circles in late 2020, the Alibaba founder has been busy engineering a sweeping overhaul of his empire. In recent days, press reports detailed how the globetrotting billionaire orchestrated the breakup of his e-commerce behemoth.

Through calls from overseas with current chairman and chief executive Daniel Zhang and other top Alibaba officials, Ma devised a reorganization that both placates Beijing regulators and offers a roadmap for reinvigorating China’s playing field for tech-related initial public offerings (IPOs).

With Ma’s breakup plan, Alibaba may “be able to unlock value via spin-offs or IPOs,” says analyst Kelvin Ho at Fitch Ratings. “This could boost Alibaba’s credit strength if capital is freed up from businesses that generate little cash and deployed in stronger cash-generating businesses or used to pay down debt.”

Yet, Ho adds, “the impact of the company’s new structure on its competitive advantages, its ability to defend against competition and capture growth opportunities, while maintaining profitability and retaining a conservative capital structure, would depend on the plan’s execution.”

In this way, Alibaba’s way forward is a sort of microcosm of challenges facing Li’s reform team in Beijing. In other words, execution is everything.

Here, it was wise for Governor Yi Gang’s team at the People’s Bank of China to set the stage for financial stability. Last week, the PBOC announced a 25-basis-point cut in banks’ reserve requirements. Not a big easing move, but it was Yi’s way of letting lenders know the central bank has their back.

The onus is now on Li’s effort to recalibrate growth engines from exports and investment to domestic demand-led growth. Many, of course, worry that Xi’s efforts to consolidate power will get in the way of Li’s latitude to increase the private sector’s role.

For China, the unfortunate legacy of Japanese leader Shinzo Abe’s failed plan to revitalize Asia’s second-biggest economy is worth studying. Ten years ago, the late-prime minister promised to cut bureaucracy, increase productivity, unleash a startup boom, revolutionize corporate governance, empower women and attract waves of top foreign talent.

Sadly, Abe mostly pushed the Bank of Japan to ease aggressively to devalue the yen. That deadened the urgency for policymakers to tackle economic inefficiencies and corporate chieftains to increase competitiveness and profitability.

This lost decade of Tokyo reform enabled China to increase its global and regional footprint. The lesson from this cautionary tale is that Beijing’s leaders must not squander this window of opportunity to make the next decade more about Alibaba, Baidu, Didi and Tencent than China Evergrande and other debt-plagued property developers risking default.

Making this transition is just as important to Asia as China’s 1.4 billion people. And it would go a long way toward buttressing China’s soft power in the region.

In the meantime, OPEC+ just monkey-wrenched Asia’s 2023 in ways that complicate the ADB’s optimistic growth outlook. The Saudi Arabia-led move to slash crude output in coordination with Russia shocked markets, paving the way for a return to $100 a barrel later this year.

“It’s certainly plausible that oil prices could go even higher and introduce another challenge for the region,” ADB economist Park says.

It hardly helps that “OPEC now has very significant pricing power relative to the past,” says Goldman Sachs analyst Daan Struyven. As of now, Saudi Arabia, the United Arab Emirates and Kuwait are seen as being “almost immediately” compliant with the output downshift.

Craig Erlam, analyst at OANDA, adds that “at this point, the only thing that’s clear is that OPEC+ has no appetite for Brent prices below $80 a barrel. That could make any future foray below there challenging as the group has now shown not only will it cut production, it will do so without warning. That is clearly the message they wanted to send.”

The pivot drew howls of protest in Washington, where US Treasury Secretary Janet Yellen called the oil cartel’s decision “unconstructive.” Though US President Joe Biden downplayed it, saying the fallout won’t be “as bad as you think,” few in Asia are buying that.

To be sure, China and Russia can limit OPEC fallout by tapping cheap Russian oil. This dynamic could indeed cushion the impact of rising prices. Yet China can’t manage the ways weakening consumer confidence in the US, Europe and elsewhere hits demand for its exports.

If the PBOC faced headwinds last week, OPEC+ sent even more intense ones China’s way.

That adds impetus for the PBOC to safeguard China’s outlook while Premier Li’s team focuses on building economic muscle. As the ADB’s projections attest, there’s never been a better time for China to demonstrate it has Asia’s back than amidst the chaos of 2023.