EEU: irrelevant anachronism or growing digital business momentum?

At this year’s sessions of the National People’s Congress (NPC) and the National Committee of the Chinese People’s Political Consultative Conference (CPPCC), the Chinese government’s work report set an economic growth target of 5.5 % and a deficit-to-GDP ratio of 2.8% for 2022. For the country’s domestic market, lower growth targets and deficit-to-GDP ratio indicate that economic growth this year will strive to be stable, in at the same time that budgetary policy will be “limited proactivity”.

On March 7, the performance of the Chinese stock market again showed the phenomenon of “A-shares falling in both sessions”. The SSE Composite fell below 3,400 points to 3,372.86 points, down 2.17%; the SZSE component index closed at 12,573.43 points, down 3.43%; the Growth Enterprise Market Index closed at 2,630.37 points, down 4.3%. Does this mean that financial markets are disappointed with this year’s economic targets and fiscal policy? The answer is probably negative.

Most Asia-Pacific stock markets also plunged that day. The Hang Seng index fell 847.66 points, or 3.87%, to 21,057 points; the Nikkei 225 closed at 25,221.4102 points, down 764.06 points, or 2.94%; The TWSE capitalization-weighted stock index closed down 557.83 points, or 3.15%, at 17,178.69 points; KOSPI composite index down 2.29%; while the ASX All Ordinaries index fell 1%. Moreover, European stock markets also fell during the opening session. As of 7:55 p.m. on March 7 Beijing time, the FTSE 100 index fell 1.17%; the DAX fell 2.56%; the CAC 40 fell by 2.65%.

Obviously, the main reason for the decline in the global stock market is not China’s macroeconomic policy, but the deterioration of the geopolitical situation and the spike in international energy prices caused by the current Russian-Ukrainian crisis. . International oil prices continued to climb sharply on March 7 at 8:00 p.m. Beijing time, with U.S. crude oil futures up 6.66% at $123.39 a barrel and Brent crude up 6.25% to $125.49 a barrel. Rising oil prices and market concerns about US and European sanctions on Russian energy exports have fueled the process and depth of the global energy reset.

The war between Russia and Ukraine is still ongoing, and while the two sides are still trying to negotiate with each other, there are no signs that the war will stop in the near future. Russian President Vladimir Putin has again hardened his stance that his military will not halt operations unless Ukraine meets Russia’s demands and Ukrainian forces lay down their arms. In the face of adverse circumstances, capital markets will find it difficult to have confidence in future economic prospects, and geopolitical risks will cast a shadow over global markets.

Although China is not directly involved in this geopolitical conflict, as a major power with a huge domestic market, it is not immune to the impact of international risks. What is certain is that China’s goal of “stable growth” this year will face a more complicated environment, and it will be difficult for it to be left out in a rapidly changing international environment.

First, in this era of “post-earth development”, the Chinese economy is still struggling to find new engines of growth. Efforts such as shifting from an investment-driven economic model to a consumption-driven economic model, supply-side structural reform, and the implementation of a proactive fiscal policy have not succeeded. to reverse the trend of slowing economic growth in the country. It should be noted that since 2010, China’s economic growth rate has continued to decline for 10 of the 12 years (except for the 6.9% increase in 2017 and the 8.1% rebound % in 2021 due to a weak base effect caused by the COVID-19 pandemic). After the fluctuations caused by the pandemic, economic growth is expected to return to its previous slowing trend. ANBOUND analysts believe China’s economy will likely enter the “era of 5% economic growth” from 2022.

China’s GDP growth from 2001 to 2022 (%)

Source: National Bureau of Statistics of China

Second, a variety of negative external factors will affect China’s economic recovery. The market had high expectations for a global and Chinese economic recovery as the global COVID-19 situation improved. However, the outbreak of the Russian-Ukrainian crisis halted this recovery process and posed a considerable challenge to China’s economic recovery. Given the geopolitical risks, China’s huge energy demand, its heavy dependence on foreign energy (more than 70% in the oil category) and its need for a place in the international market , the external environment of the country’s economy can only be difficult this year. year. Since China has not yet built a strong “internal circulation”, the impact of “external circulation” will spill over to its domestic market.

In addition to the above factors, China’s policy choices in a changing world will also affect its long-term economic growth in the future. The British think tank Chatham House recently published an article pointing out that the “fortress economy” is having a major impact on China and Russia. “Fortress economics” advocates that any country with very bad relations with the United States should try to earn more than it spends. Managing a current account surplus is preferable to managing a deficit, which requires external financing. “Fortress economics” also advocates building up large foreign exchange reserves to support a country’s ability to spend in the event of sanctions. Many of the new investment priorities now prioritized by the Chinese government, such as technology, agriculture and green energy, are aimed at reducing China’s dependence on imports, the article said. One of the main consequences of the “fortress economy” is that the economy will eventually grow less than it should.

In the opinion of ANBOUND researchers, this article which puts in the same category the Chinese economy and the Russian economy and calls them a “fortress economy” is clearly too biased and ignores the history of the economic development of the China, its position in the process of globalization, and its attitude towards reform and opening up. That said, the importance of the article is that it reminds China to be very alert to the possibility of “economic fortification” in the context of a deteriorating geopolitical environment. Under current circumstances, if China adjusts its policies in an unfavorable international environment and places too much emphasis on the “internal circulation” of its economy, it risks turning into a “fortress economy”. Such an outcome would certainly be detrimental to its economy.

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