Category: politics

How SOE Re-structuring put the CCP in charge of the economy

Since the turn of the 21st Century, China’s State Owned Enterprises (SOEs) have undergone a dramatic transformation that is widely misunderstood. Since China joined the World Trade Organization (WTO), its trade surplus has ballooned and SOE share of total exports as dropped relative to private enterprise to become relatively small. To many, this shift is correlated with moves in the late 1990s to ‘reign in’ SOEs and restructure the economy along market lines. However, the real picture is more complicated and far more interesting than this common-sense conclusion. In fact, almost all of the 57 Chinese firms on the Fortune Global 500 list are SOEs.

This phenomenon is puzzling to those who would naturally assume that relatively inefficient SOEs should be out-competed by more efficient private enterprises in a market environment. To understand this paradox, it is important to understand the nature of the shift that occurred at the end of the 1990s.

At the time, Western government’s around the world assumed that Zhu Rongji’s efforts to reform the SOE sector was akin to Gorbachev’s Perestroika program. When in reality the goal was to move toward a much more sophisticated model.

While thousands of workers were let go and vast sprawling heavy industry plants cut loose, something else was also happening. SOE enterprises were quietly repositioning themselves away from highly competitive, export-oriented, downstream industries and consolidating their grasp over lower competition, highly monopolistic up-stream industries – for example, telecommunications, information transfer, storage, banking, energy, transport and post.

At the same time, this freed privately owned, competitive enterprises to concentrate on lower value, more volatile, export-orient industries. This restructuring also drastically increased demand for the intermediate goods, services and factors SOEs provide allowing them to charge monopoly prices consolidating the party’s control over the economy at large.

With SOE enterprises ostensibly under government control, instead of freeing the economy from SOEs, this upstream/down-stream restructuring created a hyper-profitable SOE sector capable of subordinating the private economy into lower value markets, consolidating State control over the economy at large.

World Bank Issues China Economic Update Synopsis

To download the full report click here.

COVID SHOCK

Conditions in China and the rest of the world have changed dramatically over the last six months. The COVID-19 pandemic has taken a severe human toll, caused the deepest global recession in eight decades, and inflicted enormous damage on jobs and welfare worldwide.

FORECAST

For China our baseline forecast envisions a sharp slowdown of growth to 1.6 percent this year, which would mark the slowest expansion since 1976. While supply side constraints have eased and economic activity has started to rebound, domestic and external demand remain fragile and restrain the pace of recovery, despite the swift measures taken to contain the economic fallout.

IMPACT

Even as economic activity rebounds, the shock is likely to leave the economy scarred. The pace of poverty reduction is expected to slow, reflecting labor dislocation and slower growth in household incomes. Our projections show that without additional policy measures, 8-20 million fewer people are projected to escape poverty in 2020, compared to the pre-pandemic scenario. Self-employed workers and those in less secure, informal jobs, particularly migrant workers, are being especially hard hit.

RISKS/POLICY

While risks are exceptionally high, they can be partially mitigated by good policies.

MONETARY.

Policy makers will need to ensure monetary and financial sector policies remain flexible to ensure abundant liquidity and keep market rates and bond yields low, easing the debt burden on households, firms, and governments. At the same time, financial risks should be managed carefully especially since the shock has further aggravated China’s debt levels, which were high even before COVID.

FISCAL/SOCIAL.

Fiscal policies would will need to play a critical role in supporting the recovery, and stimulus measures can should be designed in a way that contributes to achieving more inclusive, carbon-neutral and greener growth. The pandemic has amplified the need to close gaps in China’s social safety nets both to support distressed workers and households, and to help minimize lasting weakness of domestic consumption.

STRUCTURAL.

Accommodative macroeconomic policies to support demand could be accompanied by deeper structural reforms to stimulate a stronger, job-intensive recovery and to facilitate adjustment to the post-pandemic economy. Reforms to address barriers to labor mobility, including further liberalization of the Hukou system would facilitate movement of labor from firms and sectors suffering more persistent damage to expanding sectors, firms, and locations.

SUSTAINABLE AND INCLUSIVE RECOVERY

The pandemic shock has exposed deeply connected economic, social, and environmental fragilities, further increasing the urgency of achieving China’s objective of rebalancing the economy toward more inclusive, sustainable, and greener growth. The recovery offers an opportunity to accelerate progress towards these goals.

ADB Unveils Economic indicators for People’s Republic of China

The People’s Republic of China’s GDP expected to grow by 1.8% in 2020 and 7.7% in 2021 with inflation rates forecast at 3.0% in 2020 and 1.8% in 2021.

Below are the numbers in detail:

Comparative economic forecasts

The latest available economic data for the PRC compared to other regions in East Asia.

COVID-19 to Plunge Global Economy into Worst Recession since World War II -World Bank

According to the World Bank the swift and massive global shock of Covid-19 and the measures to contain it have plunged the world economy into a severe contraction.

According to World Bank forecasts, the global economy is set to shrink by 5.2 percent this year representing the deepest recession since the Second World War, with the largest fraction of economies experiencing the largest declines in per capita output since 1870, according to their June 2020 Global Economic Prospects. Download here for depressing reading.

Economic activity between advanced economies is anticipated to shrink 7 percent in 2020 with domestic demand and supply, trade, and finance severely disrupted.

Emerging markets and developing economies (EMDEs) are expected to shrink by 2.5 percent this year, their largest collective decline for sixty years,  with per capita incomes expected to decline by 3.6 percent – tipping millions into extreme poverty.

The hardest blow is hitting countries worst affected by the pandemic and where there is heavy reliance on global trade, tourism, commodity exports, and external financing.

While the situation in each country will be different, all EMDEs have vulnerabilities that are magnified by external shocks. Moreover, interruptions in schooling and primary healthcare access are likely to have lasting impacts on human development.

“This is a deeply sobering outlook, with the crisis likely to leave long-lasting scars and pose major global challenges. Our first order of business is to address the global health and economic emergency. Beyond that, the global community must unite to find ways to rebuild as robust a recovery as possible to prevent more people from falling into poverty and unemployment.”

said World Bank Group Vice President for Equitable Growth, Finance and Institutions, Ceyla Pazarbasioglu. 

In a best case scenario, assuming the pandemic recedes sufficiently to allow the lifting of some mitigation measures by mid-year in advanced economies and a bit later in EMDEs; adverse global spillovers ease during the second half of the year; and that dislocations in financial markets are not long-lasting — global growth is forecast to rebound to 4.2 percent in 2021, as advanced economies grow 3.9 percent and EMDEs bounce back by 4.6 percent.

However, the outlook is massively uncertain given the inability of nations to cooperate and the downside risks are potentially huge; including the possibility of a more protracted pandemic, financial upheaval, and retreat from global trade and supply linkages.

A worst-case scenario could lead the global economy to shrink by as much as 8 percent this year, followed by a sluggish recovery in 2021 of just over 1 percent, with output in EMDEs contracting by almost 5 percent this year.

The U.S. economy is forecast to contract 6.1 percent this year, reflecting the the lack of coordinated pandemic-control measures.

Euro Area output is expected to shrink 9.1 percent in 2020 as widespread outbreaks took a heavy toll. Japan’s economy is anticipated to shrink 6.1 percent.

“The COVID-19 recession is singular in many respects and is likely to be the deepest one in advanced economies since the Second World War and the first output contraction in emerging and developing economies in at least the past six decades. The current episode has already seen by far the fastest and steepest downgrades in global growth forecasts on record. If the past is any guide, there may be further growth downgrades in store, implying that policymakers may need to be ready to employ additional measures to support activity.”

said World Bank Prospects Group Director Ayhan Kose.

World Bank Reports True Impact of Covid-19 Globally

As countries around the world contend with the health emergency of the COVID-19 pandemic, the economic effects of mitigation measures have immediately impacted the world’s commodity markets and are likely to continue to affect them in the longer term. 

The global economic shock of the pandemic has driven most commodity prices down and is expected to result in substantially lower prices over 2020, the April Commodity Markets Outlook reports. The following figures are courtesy of the World Bank.

The COVID-19 pandemic is expected to plunge most countries into recession in 2020, with per capita income contracting in the largest fraction of countries globally since 1870. Advanced economies are projected to shrink 7 percent. That weakness will spill over to the outlook for emerging markets and developing economies, who are forecast to contract by 2.5 percent as they cope with their own domestic outbreaks of the virus. 

Taking care of the land and preserving biodiversity – through healthy soil, reliable water access and pollinators – is vital for providing livelihoods for rural populations, particularly during times of economic shock like that caused by the current COVID-19 pandemic.

Healthy ecosystems have been shown to provide a lifeline to the poorest. The Poverty Environment Network project that collects income data of forest adjacent communities from 24 countries, estimates that environmental income (most of it from the forest) represents 28 percent of total income of these households