Wang Yiming: Global Economic Recovery Still Faces Risks and Challenges

Speech by Wang Yiming, Vice Chairman of CCIEE, at the China Development Forum 2021

After experiencing the impact of the COVID-19 pandemic in 2020, the world is now full of expectations for economic recovery in the near future. The accelerated delivery of vaccines and the continuous increase in vaccination rates have brought hope to people around the world. The policy support of major economies has added impetus to the steady recovery of the global economy. International institutions and major economies have generally raised their economic growth forecasts for this year. Optimists expect that 2022 will usher in a “new world”. However, we still need to see that the current global economic recovery is still unstable and unbalanced, and the various potential risks caused by the impact of the pandemic cannot be underestimated. The economic recovery will still face many risks and challenges for the following reasons.

First, the economic recovery is still affected by the uncertainty of the pandemic. With the expansion of vaccine coverage, we are likely to see an accelerated economic recovery. However, the recovery process will largely depend on the vaccination rates and their effectiveness. If the vaccination rate is not as good as expected, or the virus variants reduce the effectiveness of the vaccine, the economic recovery will still be plagued by the pandemic. From the experience of the European countries such as France and Italy, the pandemic may still come back and the recovery process will face great challenges.

Second, the imbalanced recovery of the global economy has intensified. During the pandemic, developed countries adopted extremely loose fiscal and monetary policies, which played an important role in stabilizing the economy and financial markets. However, emerging market countries have rather limited policy space and hence a slow economic recovery due to their financial pressure. Even in developed countries, the asymmetry and redistributive effects of the pandemic impact have led to widening income gaps and increasing social inequality. The “K-shaped recovery” trend has become more obvious, which may strengthen the rising protectionism, populism and counter-globalization. All of these will delay the recovery of the global economy.

Third, the increasing debt will create more risks. In response to the impact of the pandemic, major economies have launched fiscal policies of unprecedented scale and hence their debt has increased significantly. According to IMF, as of the end of September 2020, countries around the world have launched a total of 11.7 trillion dollars in fiscal plans, which is more than 12% of the world’s GDP for the whole year. Yet, some countries are still introducing new stimulus policies. For example, the US Congress passed a $1.9 trillion stimulus plan. While these measures will promote economic recovery, they will also increase the pressure on debt risks.

Fourth, the spillover risk of the monetary policies of major economies. The US dollar is the world’s most important reserve currency and thus, the Fed’s zero interest rate and unlimited easing policies have not only exacerbated excessive global liquidity but also led to a large capital inflow into emerging market countries in the short-term, which will push up the appreciation of the local currencies. If the US economy rebounds more than expected and the Fed tightens its monetary policy, it may cause a large-scale capital outflow from emerging market countries, and even lead to a sharp fall in asset prices and financial market turmoil.

Fifth, the rise in commodities has pushed up inflation expectations. The recovery of the global economy and the restorative growth of demand, combined with loose liquidity, triggered a sharp rise in commodity prices. The crude oil price index is close to the highest point of last year, and the price of non-ferrous metals is also rising rapidly. At the same time, the interest rates on US 10-year Treasury bonds have risen significantly. Once inflation expectations are confirmed, the monetary policy will experience a reverse adjustment and hence accelerate the exposure of potential risks.

Facing the risks and challenges in the recovery process, the international community must strengthen multilateral cooperation in areas such as vaccine distribution, macro policy coordination, maintaining financial market stability and promoting green recovery. As the two largest economies, China and the United States should play a more important role.

2021 is the first year of China’s implementation of the “14th Five-Year Plan”. Last year, China’s economy grew by 2.3%, making it the only major economy in the world that achieved positive growth. Setting an expected growth target of more than 6% this year reflects China’s pursuit of higher quality, more efficient and sustainable growth, which will also give China enough space for dealing with uncertainties, preventing risks, and conducting structural reforms. As China’s economy gradually returns to normal, the normalization of macroeconomic policies has also been put on the agenda. Due to the structural differences in economic recovery and the difficulties facing small, medium and micro enterprises, the central government will maintain a stable macroeconomic policy to support economic recovery and strike a balance between stabilizing growth and preventing risks.

In the long-term, China will accelerate the construction of the new development pattern of “dual circulation”. The domestic circulation means the expansion of the domestic market, while the international circulation requires further opening-up and create more markets for goods and service offered by other countries. The Chinese economy has been deeply integrated into the world economy and the international division of labor, and the domestic and international circulations are interdependent and inseparable. In the practice of reform and opening-up, China has deeply realized that opening-up brings progress and vice versa. Looking to the future, China will unswervingly expand its opening-up, and build an institutional system and regulatory model that are in line with internationally accepted rules. This will not only advance China’s development but also promote the common development of the world.