Chen Wenling Participates in the China-German High-Level Economists Closed-door Routable

Invited by the Chinese embassy in Germany, Chen Wenling, Chief Economist of CCIEE, went to Berlin for the China-German High-Level Economists Closed-door Routable from October 26 to 28, 2017.

This year marks the 45th anniversary of the establishment of the diplomatic relations between China and Germany. President Xi Jinping and Premier Li Keqiang visited Germany in the past summer and proposed some new ideas and new requirements for the China-German relations. In order to implement those new ideas and requirements, promote a healthy development of the China-German relations and the bilateral economic exchanges, the Chinese embassy in Germany and the German government departments jointly organized the China-German High-Level Economists Closed-door Routable. The meeting comes at a time when the communist party of China just concluded the 19th national congress, Chinese ambassador to Germany Shi Deming delivered a speech regarding the report of the 19th CPC National Congress and the China-German relations. Chinese economists interpreted the spirit of the 19th CPC national congress.

20 top economists from China and Germany are invited to take part in the "10 + 10" dialogue and conduct in-depth discussions and exchanges on four issues. In addition to the CCIEE Chief Economist Chen Wenling, other Chinese economists are: Zhang Yuyan, Director of the Institute of World Economics and Politics, Chinese Academy of Social Sciences, professor Zhang Weiying, National School of Development, Beijing University, Xu Xiaonian, professor at the China Europe International Business School, Chen Zhiwu, former professor of Yale University,  Ren Zeping, Chief Economist of Founder Securities, Hong Junjie, Dean of the School of International Trade and Economics, University of International Business and Economics, Ju Jiandong, professor at PBC School of Finance, Tsinghua University, Lin Xueping, professor of Chinese Electronic Information Development Institute, and Yang Fuqiang, senior adviser of the Natural Resources Defense Council.

On the German side, the economists include Buttner Thiess, President of the Advisory Committee of the German Finance Ministry, Kagermann Henning, originator of the German industrial 4.0 and President of the National Academy of Sciences and Engineering, Schneider Stefan, Chief Economist of Deutsche Bank, Wambach Achim, Chairman of the German Antitrust Committee, Hellwig Martin, member of the Advisory Committee of the German Ministry of Economic Affairs, Max Planck, Director of the Marx Planck Institute for Public Goods, Langhammer Rolf, member of the Advisory Committee of the German Economic Cooperation Department and President of the Kiel Institute of World Economy, Edenhofer Ottmar, former Co-chairman of the UN Intergovernmental Panel on Climate Change (IPCC), and Chief Economist at the Potsdam Institute for Climate Policy Research, Gropp Reint, Director of the Halle Institute for Economic Research, Schmieding Holger, Chief Economist of the Berenberg Bank and Chief Economist of the Institute of Handelsblatt.

The roundtable is divided into four sessions, the first session is “World Economic Pattern”,  discussing how will the world economy develop after the financial crisis, the outlook of Europe and China and the challenges facing them, and if the western economic theory can explain China’s economic development. The second session is “Climate Change and Energy Policy”, which mainly discusses how to deal with the US withdrawal from the Paris Agreement, and how will China and Germany lead the global energy revolution. The third session is “Trade and Investment and Finance”, discussing whether president Trump will trigger a significant adjustment to the global trading system, the openness and fairness of the international investment environment, how to view the relationship between debt and economic growth in the post-the financial crisis period. The fourth session is the “New Industrial Revolution”, mainly discussing the new industrial revolution from a global perspective, the competition and cooperation between “Made in China 2025” and German industry 4.0.

Speech at the First Session of the China-German High-Level Economists Roundtable Dialogue

I am very honored and happy to attend this meeting today. I am the chief economist of the China center for international economic exchanges. Before joining CCIEE, I served as the Director-General of the General Department of the State Council Research Office. CCIEE is one of the 25 national high-end think tanks in China and many of its research findings have been adopted by the central government, such as the proposal of establishing the AIIB, and the recommendations on the belt and road initiative.

Since it was founded 9 years ago, CCIEE has followed the world economy closely and published the “The Analysis of the World Economy” at the end of every year. Every month, CCIEE holds the Monthly Economic talk, discussing hot domestic and international economic issues. At the Monthly Economic Talk held on 19 October 2017, my presentation analyzed the current situation of the world economy. It is a great honor for me to be the first speaker today and talk about the economic development in the ten years after the financial crisis.

First of all, it has been ten years since the international financial crisis broke out, the international economy and trade have been stumbled along the bottom until a smooth turning point appeared last year, implying that the world economy has gradually entered the cycle of recovery.

Three of the world’s large organizations, OECD, IMF and World Bank are very optimistic about the global economy and predicted the world economy in 2017 and 2018. All three organizations agreed on that the world economy has started to recover. The survey of the OECD on 45 countries shows that all these countries will experience positive economic growth. The IMF forecasts that 75% of the world’s economies are either in the process of growth or recovery. The World Bank predicts that the world economy will grow by 3.6% in 2017, IMF reckons 3.6% while the OECD expects this figure to be 3.34%. This has proved that the forecast we made last year is correct, the world economy will start to recover and the turning point emerges.

Another important factor is that the international trade has also begun to recover. Ten years before 2008, the average annual growth of the international trade was 7%, this figure was less than 3% from 2009 to 2016, and just 1.7% in 2016. According to the forecast made by WTO and the IMF, the annual growth will reach more than 4% this year. The growth of world trade is the engine and main driving force for the world economic growth.

The third factor is that the emerging economies grow faster than developed economies. Emerging economies as a whole can achieve an economic growth of 4.6% in 2017, and 4.9% 2018, while the developed countries are expected to grow by 2.2% and 2.3% respectively. As can be seen, emerging economies and developing countries have become the main power driving world economic growth, especially China. The average annual contribution China made to the world economic growth is 30% or more since 2008. In the report of the 19th CPC national congress, President Xi Jinping cited that the average annual GDP growth of China was 7.2% from 2012 to 2017, and its contribution to the world economy is more than 30%. All these factors suggest that the world economy will enter into a new cycle of recovery.

Secondly, the era of the global quantitative easing policy is basically over. Marked by America’s interest rate hike, the world has gradually entered into a new cycle of deleveraging, reducing debt and increasing interest rate, especially after the US announced the end of the four rounds of QE policy in 2014. The US has raised its interest rates four times since December 2015, and it is highly likely that the US will do it one more time this year. Of course, this will ultimately depend on the decision of president Trump and Yellen. In the past October, the US has begun to streamline its balance sheet, started with $10 billion, followed by $30 billion every quarter, and their ultimate goal is to stabilize the balance sheet at $3.3 trillion from 2022 to 2023.The current debt level of the U.S. central bank is $4.5 trillion, so the shrinkage of the balance sheet designed by the US also has a timetable and roadmap.

Thirdly, the commodities industry, represented by oil and natural gas has just ended the era of big price movement. We predicted that the commodities price will float within a broad range, which can be summarized in two scenarios. The first one is that the oil price will move between $45 and $55 per barrel, or between $55 and $65. In the last round of oil prices turbulence, the oil price peaked at $146 a barrel, and was as low as $28 a barrel when the market was in a slump. The oil price will not be as volatile as before due to three stabilizers. The first stabilizer is the US. When the US started the production of shale gas, the cost was equivalent to $80 per barrel oil, but it has fallen to an average of $34 to $45 a barrel due to the technology revolution. If the oil price falls below the price of shale gas, the US production of shale gas will lose money, which is why we consider the cost of shale gas in the US is a stabilizer.

The second stabilizer is the OPEC and Russia. OPEC has started to limit its production since last year, and Russia joined the reduction last December. In October, Mr Putin met with the king of Saudi Arabia in Moscow, and they decided to extend the production limit to 2018. This can also be seen as a stabilizer because OPEC and Russia are the two largest oil producers.

The third stabilizer is China. China is the biggest oil importer, 70% of its oil consumption is imported, which accounts for nearly 50 percent of the international market. More importantly, China is promoting the oil settlement in RMB and this has been accepted by countries like Russia, Venezuela, and Saudi Arabia. I think this is also a stabilizer of oil price.

Fourthly, in the past decades, the labor-intensive manufacturing was gradually moving from developed countries to the emerging economies led by China, however, the fifth round of global manufacturing has entered into a new period. At present, the labor-intensive industries has been mainly transferred to countries and regions with low labor costs in South Asia, Southeast Asia and Africa. Another noteworthy change is that some manufacturers are moving back to the developed countries, such as the United States because of their tax burden, management cost, financial cost and other costs are very close to China. This also explains why there are more Chinese companies started to conduct offshore trade in the US and increased their investment overseas. In 2016, Chinese companies’ investment in the US reached $45.6 billion. The building of the belt and road allows China to accelerate the manufacturing transfer in China through international production capacity transfer. The three paths symbolize the ending of shifting the labor-intensive industries to China and the beginning of the new industrial transfer.

Fifth, the new economy and new business model are constantly emerging and the world is entering into a new cycle of kinetic energy conversion. The rapid development of new technology such as intelligent manufacturing, perception of things, the internet of things, big data, cloud computing and cloud service has triggered a new round of technological revolution. This is also the case in the developed countries, for instance, the industry 4.0 in Germany, and the advanced internet industry in the United State. China launched the program of “Made in China 2025”, India and Russia have all proposed smart manufacturing plans. New business models are also taking place in China, including Didi Chuxing, the high-speed trains, mobile payments and sharing bicycles, known as the new four innovation in China. The new momentum of the world economic development is becoming stronger and stronger.

The last characteristic is that the leader and promoter of the economic globalization has changed to China, Germany and other major powers, who are playing a more important role in the international arena, especially in promoting the new economic globalization, international rules and reshaping international order. Therefore, we can infer that the global economic governance and the reshaping of global rules have also entered into a new cycle.

The seven aspects described above are my judgments on the ten years after the ending of the international financial crisis. In the long-term, the international economy still faces a lot of serious problems, in particular, we should keep a close eye on the following ones.

First of all, the trend of anti-globalization. I think that president Trump is an important factor of the anti-globalization. Generally speaking, Trump’s ruling can be summarized in four words: the first word is “withdrawal”. President Trump withdraws from any agreements that do not conform to the American interests, including the TPP, the Paris agreement, and the United Nations Educational, Scientific and Cultural Organization. On 28 September, we released the research findings of the Next Generation of Trade: E-International Trade at one of the WTO meetings, at which some foreign experts complained that it is now very difficult to deal with the US and the US might withdraw from the WTO if the WTO cannot meet the requirement of fair trade, defined by the United States. Thus, I think if the US continues to retreat, it might exit the United Nations.

The second word is ban, such as the Muslim ban issued by the Trump administration, including stop 800 million children from entering the US. Apart from that, the trump administration also plans to build a U.S.-Mexican border wall to stop illegal immigration from Mexico.

The third word is abolishment. The Trump administration has abolished a series of bills passed by the Obama administration, such as the Obamacare.

The fourth word is loosening, such as the deregulation of the financial and environment market. All the four words will have a negative impact on the US and the rest of the world except the last word. Thus, we should keep an eye on the impact of the Trump factor on the anti-globalization.

The second challenge is the unresolved problems of the international financial crisis. Apparently, the financial crisis is ended, nonetheless, many problems remain to be unsolved. There are two types of risks that may trigger another financial crisis. Recently, the bank of international settlement discovered that the US has 10.7 trillion US dollar of long term swap contract and different financial derivatives, but they cannot be found in the book. Moreover, the problems produced by the current pension system may also trigger another financial crisis, let alone the risk associated with the widespread virtual Bitcoin.

Thirdly, we should pay close attention to the economic fluctuations of the world’s major economies such as Japan and India. The Brexit will certainly have significant impact on the world economy,

Last but not least, regional wars and conflicts will also influence the world economy, especially North Korea, Islam, the nuclear program in Iran, and Kurdistan. Furthermore, this year is the year of election as 35% of all the nations will hold the general election and this figure will decrease to 20% in 2018. Undoubtedly, an election is likely to bring uncertainties and affect the economic policy. Among all those uncertainties, natural disaster and serious infectious diseases are also the ones we have to deal with in the future.

Overall, the world economy as a whole has reached a turning point and started to recover, but the deep-rooted problems affecting the world economy remain unsolved. We have to prepare ourselves for the important variables and risks.

That is the end of my speech. Thank you very much!