Chen Wenling: Ten Major Risks and Hopes of the Current World

A speech delivered by CCIEE Chief Economist Chen Wenling at the “The Impact of the Coronavirus on Economic Cooperation in the Asia-Pacific”

Dear host, distinguished friends, good morning!

It is a great honor to participate in today’s meeting! The previous speeches are wonderful and I would like to talk about the ten major risks and hopes of the current world.

The pandemic has become the biggest variable of the current world economy and has already brought or will bring us the following ten types of risks.

1. Life risk, or public health safety risk. The pandemic has spread to 214 countries and more than 4 million people have been diagnosed with the coronavirus. The confirmed cases in the United States accounts for 1/3 of the world’s total and Europe accounts for 1/2. Generally speaking, Asian countries have put the pandemic under good control but the spread of the pandemic is not over yet.

2. The risk of industry chain breakage, which is likely to bring the global economy to a recession. The pandemic has brought great challenges to the well-established global manufacturing industry, and the supply and industrial chains have been cut off by the lockdowns.

3. Inflation risk. The unlimited QE policy of the United States has led many countries to follow suit. Low interest rates, zero interest rates and negative interest rates will lead to inflation. At a certain point, deflation in some countries will turn into inflation, which has already appeared in some places. For example, China’s inflation rate was on the rise in the first quarter.

4. Debt risk. Last year, global debt exceeded $250 trillion, and the US alone exceeded $23 trillion. At present, it is very difficult for most of countries to stimulate the economy with monetary policy as they already have huge accumulated debt. In some countries, debt risk will increase sharply.

5. Financial risk. In the past March, the financial market was full of ups and downs. Loose monetary policy, low interest rates, zero interest rates, negative interest rates, and the pandemic will continue to increase financial risks. The market-wide circuit breaker has been triggered four times in the US since March 9.

6. Food risk. China can eliminate this risk but some countries and regions will have problems doing so. According to a report released by the World Food and Agriculture Organization yesterday, 265 million people will suffer a food crisis. The locust plague in East Africa and the drought in some countries will cause a food crisis.

7. Energy risk. The supply side will be greatly challenged. When the price of crude oil futures dropped to $20, more than 500 shale oil and shale gas energy companies in the United States closed. If the price continues to fall, another 1,100 energy companies will close in the United States, which is an important reason for market-wide circuit breakers. In the future, energy demand will exceed supply but currently, the demand side is also facing great risks due to the pandemic and the halt of energy production.

8. Trade and investment-related risk. Global trade has fallen sharply and the WTO predicts that there will be negative growth of -8% to -32% this year. The global flow of people, logistics, information, and capital have been blocked and foreign trade will also face huge risks. According to predictions made by different international organizations, foreign direct investment worldwide will fall by more than 40%.

9. Security risk, including personal safety, geographical safety and safety of the entire international community. The national reunification of China is facing serious challenges too. The United States has interfered with China’s internal affairs and threatened our national security by enacting laws on Taiwan, Hong Kong, Xinjiang, and Tibet. Moreover, US warships continue to enter the South China Sea and provoke China. Eight of the 11 aircraft carriers have been deployed to Asia.

10. The risk of war. Some countries do not rule out the use of war to pass on domestic social conflicts and economic crises. Some countries have stigmatized China and asked China for compensation because their domestic economies might collapse.

These ten risks mentioned above have brought unprecedented challenges to the world. We are facing the darkest moment since the economic depression of 1929. This is my first point of view.

My second point of view is that the center of the world economy is in the Asia-Pacific region. China’s manufacturing and supply chain should link with its neighboring countries first.

The output value of China’s manufacturing industry accounts for about 30% of the world’s total. In the first quarter of this year, the suspended production in China affected the global industrial chain seriously, especially the industrial chains closely correlated to China. Recently, China has gradually resumed production but orders have dropped significantly because many countries have also suspended their productions because of the pandemic outbreak. The global industrial chain links might break.

The previous speaker said that the global industrial chain can be roughly divided into three major sections, Asia, Japan and the EU, and North America, I think that the Asia-Pacific region is the most competitive one. The economy of the RCEP (India is not included) accounts for 28.9% of the global economy; the economy of CPTPP accounts for 13.1% of the global economy. Japan and the European Union signed a FDA and their economy accounts for 28.1% of the world’s total. The US-Canada-Mexico Free Trade Zone accounts for 27.6%. From the perspective of manufacturing, China, Japan, South Korea, ASEAN, India and other countries and regions are very important manufacturing bases, accounting for nearly 50% of global manufacturing output. I think that the center of the global economy and industry is still in the Asia-Pacific region, especially in Asia, which consists of two sectors: China-Japan-South Korea, and China-Japan-South Korea+ASEAN. Last year, the EU was China’s largest trading partner and export market, while ASEAN was China’s second-largest export market. The trade volume between China and ASEAN in 2019 exceeded US$580 billion, which surpassed the US. From January to April this year, ASEAN became China’s largest trading partner, followed by the EU and the United States.

China has already resumed productions gradually and its surrounding countries are also doing better in fighting against the pandemic. When the pandemic is put under control, the Asia Pacific will be the first to re-connect the supply and industrial chains. The advantages of population size and labor force will make Asia a manufacturing powerhouse and help it recover from the economic slowdown faster than any other region.

Although some high-end components are highly dependent on the United States, we should not be afraid of that because the broken industry chain will make all enterprises along the global industry chain suffer. In terms of raw materials and chips in the upstream of the industrial chain, the United States and Japan have an absolute advantage; more than 90% of the products in the midstream are produced in China, including antennas, optical modules, optical fiber connectors and so on; for products in the downstream of the industry chain products, such as optical cables, 5G base stations, optical communication equipment, network equipment servers, 80% of the producers are located in China. As can be seen, Chinese enterprises play a major role in the middle and low-end industrial chain, while Japan is the main supplier of upstream raw materials and the United States is the major supplier of high-end chips. All the participants along the global industrial chain need to work together and the industrial link between China and the United States cannot be interrupted.

The current pandemic has interrupted the global industrial chain but the industrial chain in China will recover faster than other countries when the pandemic is over. China, Japan, South Korea, ASEAN and South Asia should work together to reconnect the industrial chain in Asia. In the high-tech industries of semiconductors and electronic communications, cooperation is the trend. Without China’s huge market, the core components produced by the US can only stay in the warehouse.

My third point of view is that the pandemic has had a great impact on the world economy and brought great uncertainties and thus, all of us should strengthen cooperation rather than confrontation.

We are now facing unprecedented changes. High-tech such as the 5G, Internet of Things, cloud computing and services will help us improve efficiency, increase economic correlation and reduce economic costs. In the future, the world will be more interconnected than ever. Whoever interrupts such kind of connection will be marginalized. The decision we make today will decide our future.

The choice made by China today is wise and rational. The United States has used its financial hegemony and international status to marginalize China but it did not work. China upholds the concept of building a common community with a shared future for mankind and adheres to the five basic principles of handling the relations between great powers correctly. The building of the “Belt and Road” has brought benefits to the participating countries and given hope to many developing and poor countries. For example, Myanmar attached great importance to the construction of the “Belt and Road” China-Myanmar Economic Corridor. Laos made the construction of the China-Laos Economic Corridor a top priority in its next “five-year plan”. The China-Laos Railway will be connected to the Thai Railway and form a Trans-Asian Railway Central Line of more than 2,000 kilometers, connecting the Gulf of Thailand and the Bay of Bengal directly. These countries have seen the development opportunities and benefits from economic cooperation with China.

I think that China has brought not just new ideas to the world, but also new opportunities and hopes for development. The world has no reason to choose retreat, confrontation or split. No matter how hard it will be, we will be able to overcome difficulties and move on.

Thank you!