Wei Benhua: China’s Economic Outlook under COVID-19 Crisis and Its Impact on World Economy

2020-05-18 IMI

This is a speech draft by Mr. Wei Benhua at the online launch meeting of IMF World Economic Outlook on April 29, 2020. Wei Benhua, Member of IMI Academic Committee, Former Deputy Administrator of the State Administration of Foreign Exchange (SAFE), and Former IMF Executive Director for China Good morning to the participants attending this online discussion of the latest issue of World Economic Outlook. Good evening to Mr. Barnett. I know you are now online in Washington DC. You are late in the evening. Sorry to keep you work in such a late hour. Let me first thank you very much for the excellent introduction of the latest issue of WEO. I do broadly share with the views as you presented us. The Covid-19 has had a much longer impact on the world economy than the Great Depression in 1929 and the previous Global Financial Crisis in 2008 in terms of GDP loss, unemployment and in many other economic indicators. The most of worrisome feature of the Covid-19 is the uncertainty it creates. We are not sure the duration and intensity of the shock caused by this Covid-19. Therefore, it would be difficult for the policy makers to make the policies accordingly to cope with the shock. The other point I’d like to echo with is that most industrial countries and emerging and developing countries as well have adopted fiscal and monetary measures with enormous strength. I do not need to elaborate on these measures. In general, there measures are bigger than those measures in the GFC. While these measures are necessary to rescue the sharp decline of their economies, I am concerned with the impact of consequences of these policies taken by industrial countries on monetary side. The immediate question is the impact caused by the negative interest rate policy which they adopted even before the outbreak of the Covid-19 in Japan and some European countries. U.S. Federal Reserve reduced its fund rate down to zero when the Covid-19 out-broke in U.S.. What would happen in the future is the emerging and developing countries will confront the situation of the capital outflows, the pressure on their currencies and the turbulence in their financial markets when the central banks of the industrial countries withdraw from the quantitative easing policy. Many emerging and developing countries did suffer when the Fed withdrew from QE afterwards. This being said, let me turn to the Chinese economy, I’d like to emphasize the point in your chart China and India are probably the only two major economies with positive growth rates in 2020. China’s GDP growth will be 1.2% for the year 2020. The IMF staff says in WEO on page 5 that the Group of Emerging market and developing countries is projected to contract by -1.0 percent in 2020 with China included; excluding China the growth rate of this group is projected to be -2.2%. In fact, Emerging Asia is projected to be the only region with a positive growth rate in 2020 mainly because of the fast recovery of the Chinese economy. The WEO is forecasting China will achieve 1.2% growth rate for 2020. We appreciate this point as China is the rare exception with positive growth rate among IMF’s more than 180 member countries. However, I am more optimistic about this projection with the following factors: First, it is projected in the report that the contraction in economic activity in the first quarter could be about 8% year over year. By the recent statistics of the SSB the contract was 6.8%, smaller than the IMF figure. Due to the effective control and prevention measures of the Covid-19, most sectors of the economy have generally returned to normal. The PMI (Purchasing Manager Index) of manufacturing actor of March was 52%, a very strong rebound . My point is that China is a large country which has 1.4 billion population and the Chinese economy is the second largest in the world. China itself is a huge market with strong demand. We could encourage and stimulate the domestic consumption to offset the temporary loss in the expert sector. It is well known that the Chinese government made a right decision to transform the development model from dependent on the export to the domestic consumption lead development model a few years ago. And we have made substantial progress on this transformation. Now consumption is making more than 56% contribution to China's GDP. For developed countries this figure is well above 60% and could be as high as 80%. We do have large room to catch up of course. Therefore, the Chinese economy is becoming more and more dynamic and resilient to the external shocks. Second, on fiscal and monetary policy, China is in a better position to use them to counter the Covid-19 shocks. The annual and cumulative fiscal deficits for China measured by any international standard is much lower company that of the developed countries. So if needed we could utilize fiscal instruments to stimulate the economy. On monetary policy, we also have good potentials to mobilize resources to support the economy. For example, we could continue lower the deposit Reserve Requirement Ratio, lower the interest rate an inject more liquidity into the economy. On the external sector, we are confident we will be able to achieve a reasonable balance so the exchange rate of RMB will continue to be stable. In addition, china will continue to pursue reform and open up policy that will enable the country to attract more foreign investment. Third, we will continue to invest in the countries under the Belt and Road Initiative. We believe the BRI counties and China will be benefited from the implementation of the Initiative. With the above factors plus that the other countries will be able to contain the spread of Covid-19 in the second half of 2020, the Chinese economy could achieve a growth rate of around 3%. Mr. Barnett, you know Mr. Zhang and I served as Executive Directors on the Board of Executive Directors of the Fund for several years. China, as the largest developing country always extends its strong support to the Fund. We support IMF as the center of the international monetary system as well to play an important role in meeting the financial needs of its member countries. We support the Fund to be equipped with adequate quota resources. In this context, we support a substantial quota increase under the 15th general quota review and we hold the representation of developing counties including China in the Fund should be fully reflected in their quotas in line with their weight in the world economy. The last point but not least, I would like to say is that the international community should work together and countries should cooperate with each other in fighting the battle against the Covid-19. Steve rightly pointed out in the policy advice that the importance of multilateral co-operation cannot be overemphasized. China as a responsible country always extends its support to IMF and other international institutions as well as helping the other countries as much as it can. We believe we should make our best effects in promoting the construction of a community with a shared future for mankind.

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Wei Benhua: China’s Economic Outlook under COVID-19 Crisis and Its Impact on World Economy

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