Current Situation of the World Economy and Its Impact on China

Bi Jiyao

?

Current Situation of the World Economy and Its Impact on China

Bi Jiyao

The world economy in 2016 will continue to experience weak recovery momentum. The divergence in performance and policies of the main economies will bring new uncertainties. The external economic environment for the Chinese economy is still complicated. In particular， factors such as weak external demand， the rising exchange rate of the US dollar and falling commodity prices will have direct impacts on China's exports， the renminbi's exchange rate and cross-border capital flows， thus further affecting China's economic performance and structural adjustments.

Given the current situation and development momentum， the performance of the world economy in 2016 will likely demonstrate the following features and trends:

World economy and trade will maintain low growth rates. After the outbreak of the international financial crisis， the world economy recovered quickly after countries implemented large scale stimulus policies. However，from 2012 onwards， after the exit from these stimulus policies and the abatement of their effects， the world's economic growth and the growth in trade fell below 4 percent. According to the main economic indicators of the leading economies since the fourth quarter of 2015， it will be difficult for the world economy and global trade to recover dramatically in the short term. The majority of research institutions and international investment banks project a mere 0.1 percent to 0.2 percent growth. According to the latest World Economic Outlook produced by the International Monetary Fund，the global economy grew by 3.1 percent in 2015 and trade by 2.8 percent，and it forecast they will grow by 3.2 percent and 3.1 percent respectively in 2016. Generally speaking， the global economy is still in the period of deep adjustment after the crisis. All countries are making great efforts to advance structural reforms， and accumulating strength for future economic growth. But it will be difficult for the global economy to get escape the low growth rate momentum in the near term. According to the middle-term projection of the IMF， it will be hard for the world economy to grow by 4 percent and trade by 5 percent per annum before 2020. These growth rates would still be lower than the annual average growth of 5 percent and 8 percent respectively five years before the financial crisis.

The trends of leading economies will further diverge. Since 2015，the developed economies have generally enjoyed sound recoveries， while the growth rates of emerging markets continue to fall. In terms of the developed countries， the US economy is growing relatively fast. Its consumption，investment and exports， as well as its real estate situation， are improving，and its unemployment rate has dropped below 5 percent. Although the economies of the eurozone and Japan have also improved， their growth rates are low and they face high deflationary pressures. The lasting recovery of the three still faces a number of constraints. Although all three leading economies adopted massive fiscal and monetary stimulus policies to boost their economies after the financial crisis， structural reforms in the eurozone and Japan are proceeding slowly. The United States has further consolidated the momentum of its economic recovery through structural adjustments. It has implemented a revitalization strategy for its manufacturing industry and plans to double its exports， and it has increased its support to energy sources such as shale gas， new technology and new industry. In terms of the internal situations of the emerging markets， Russia and Brazil experienced recessions due to the dramatic declines in commodity prices such as oil，and the geopolitical turbulence. Meanwhile they also face the pressures of capital outflows， devaluation of their currencies and increasing inflation.Other emerging markets deeply dependent on exports of resources also face difficulties to different extents. Although the general situation of emerging markets in Asia is relatively good， their internal growth power is not sufficient because of the slow pace of their structural adjustments. The weak external demand is also making it hard for them to continue with their traditional exports driven economic growth models. The Asian emerging economies are generally experiencing economic slowdowns， only India continues to enjoy a growth rate of over 7 percent.

The possibility of adjustments and fluctuations in the international financial markets is increasing. Since the economic trends of economies differ and their cycles aren't synchronized， the monetary policies of the leading economies have deviated. The US Fed has already commenced increasing interest rates. It is widely believed that one more increase will be made in 2016. Meanwhile， the European Central Bank （ECB） and Bank of Japan have adopted quantitative easing policies and implemented negative interest rate policies to boost economic recovery， which has resulted in increasing returns on US dollar assets and a rise in the US dollar's exchange rate. These will trigger lasting adjustments and fluctuations in the international bond market， exchange market， stock market and commodity market. International capital will flow back to the United States and US dollar assets faster， causing more harm to the resources exporting economies which have been badly hit by the dramatic falls in commodity prices. Capital outflows and currency devaluation will possibly trigger debt crises in the heavily indebted economies， which will intensify the turbulence in the international financial market. Stability in the financial market is the important prerequisite for stable growth of the world economy. With the persisting weak recovery momentum， the adjustments and fluctuations in the international financial market will further restrain the recovery of the world economy.

The prices of commodities are likely to continue to fall. After over a decade of a super bull market， the international commodity market is now in the difficult situation of oversupply and a collapse in prices. Currentlythe international oil price has fallen to $30 per barrel， which is 79 percent lower than the high of $145 per barrel before the financial crisis. The prices of iron ore， cooper， aluminum and zinc have fallen by over 40 percent. In the past， the long-lasting rise in the price of commodities stimulated expanded production of energy and resources. After the financial crisis， the growth rate of the global economy has hovered at a continuously low level. The oversupply of commodities will not be changed in the short term. The major energy and resources exporting countries are not willing to cut production in order to increase fiscal income and maintain fiscal balance. The oversupply in the market will continue to put pressure on the price of commodities. Also the strong US dollar will further constrain the rise of commodity prices denominated in the US dollar. Therefore the prices of commodities such as oil still have room to fall. The investment banks anticipate that the oil price in 2016 will continue to fluctuate at low level and the prices of other commodities are unlikely rebound greatly. Although the geopolitical turbulence and market speculation will possibly push up the prices of commodities such as oil in short term， they will not change the fundamentals pushing down prices. The low prices of commodities such as oil will intensify the economic difficulties of resources exporting countries and reduce the costs of resources importing countries. However， it will also increase the deflationary pressure on resources importing countries. The low prices of commodities， therefore， represent both advantages and disadvantages to the global economy.

The restructuring of global industry and adjustment of the industrial chain are accelerating. The development and industrialization process of new technology is speeding up. Emerging industries such as the mobile internet， renewable energy， the internet of things， 3D printing and smart manufacturing are developing ever faster. The universal application and fusion of the mobile internet， cloud computing and big data in finance， trade， manufacturing， education and health care will continue to give birth to new formats， new models and new industries. Traditional industries are undergoing comprehensive transformation and upgrading.As the restructuring of global industry speeds up， new types of production organizations， based on information， intelligence， miniaturization，decentralization and personalization， will gradually replace the standardized plant production organization featuring clear divisions of work and strict specifications. These new types of production organizations will become the mainstream. The international division of work will also evolve. On the other hand， the Trans-Pacific Partnership （TPP） and Transatlantic Trade and Investment Partnership （TTIP）， which are dominated by the United States，will expand market access on the basis of pre-established national treatment and management of negative lists. New topics such as labor standards，environmental protection standards， intellectual property， government procurement and competition neutrality， were included in the negotiations. The TPP and TTIP not only set new levels for the economic rules and the standards for international trade， and increase the threshold for developing countries to participate in economic globalization， they will also graduallychange the pattern of the global industry chain and have negative effects on other economies in terms of trade， investment and industry transfer.

US Interest Rates: To Raise or Not to Raise？ The divergence of major economies in policy is likely to hamper global economic stability.

The impact of non-economic factors such as geopolitics is increasing. After the international financial crisis， the global political and economic pattern has undergone profound adjustments. As the international power balance evolves， the multi-polarization of the world has become evident. The system and structure of global governance continue to change. Facing the accelerated rise of the emerging powers， developed countries such as the United States are doing their best to safeguard their global dominance and vested interests. All countries are adjusting their development strategies and external relations， which is resulting in prominent contradictions and intensified competition. Therefore geopolitical conflicts are more frequent and the impact of non-economic factors on global economic growth is on rise. Currently， the situation in the Middle East， US-Russian relations，terrorist attacks， the European refugee issue and North Korean nuclear issue are creating uncertainties.

Generally speaking， the Chinese external development environment is still complicated and volatile. On the one hand， peace and development remain the themes of the times， which is conducive to China's continuous development. On the other hand， the profound repercussions of the international financial crisis will persist for quite a long time. The world economy is still at the stage of post-crisis adjustment and evolution. The complexity and change in geopolitics are resulting in more unstable and unclear factors. The weak growth momentum in global trade and the world economy will not be improved in short term. The challenges posed by the changing external environment are growing.

Currently， the impacts of the changes in the external environment on China's economic development are demonstrated largely in the following areas:

First， the weak growth of the world economy and global trade has not only caused external demand to decline， it has also brought the motivation and opportunity for China to deepen its structural reforms and quicklycultivate new growth forces. After the international financial crisis， the growth rate of Chinese exports has continually fallen. It was even negative in 2015. The central government's exports target hasn't been achieved for four consecutive years. Given the continuing weak momentum in global trade growth China's exports face many challenges in 2016. As the international economic environment changes and China's economic development enters its new normal， it cannot rely on the expansion of exports and investment to drive economic growth as before. As China moderately expands its gross demand， it should pay more attention to supply-side structural reform. In particular China should adapt to the structural change of domestic and international demand， improve the quality and benefits of its supply system，implement an innovation driven development strategy， and cultivate new drivers of economic growth. China should adjust and upgrade its industrial structure to promote the quality of its imports and exports， making imports and exports play a better role in promoting economic growth and the optimization and upgrading of its industrial structure.

Second， with a great revolution in science and technology underway，China not only has the opportunity to catch up， it also faces the risk of the gap between itself and the developed countries widening， as well as the risk of its traditional industry being eliminated technically. After the international financial crisis， the developed countries increased their inputs into R&D and new technology， new products and new industries to occupy the high end of the value chain in future industry development and international competition. The emerging economies also made efforts to push forward structural adjustments， undertaking international industry transfer and paying more attention to developing their manufacturing industries. Quite a large gap exists between China and the developed countries in science and technology innovation and the development of emerging industries. Its traditional cost advantages in manufacturing are gradually being lost. The development of its industry and progress faces competition from both sides. Unless China can effectively push forward innovation in science and technology， along with the adjustment of its industrial structure， thegap with developed countries will probably further widen. China will be at disadvantageous position in the new round of international industrial competition， while also facing fierce competition from other emerging economies in traditional manufacturing.

Third， the change in supply and demand and falling prices of commodities not only offer advantages to China through lower import costs and increased imports of energy and raw materials， it has also exacerbated the difficulties for upstream industries and enterprises. China now is at the decisive stage of realizing a moderately prosperous society. To speed up industrialization and urbanization as well as maintain the sustainable and healthy development of its economy will increase the gross consumption of energy and resources. Therefore the easing of the supply and demand relationship and low commodity prices， such as price of oil， are generally conducive to safeguarding the security of its supplies of energy and resources and for reducing development costs. On the other hand， as it is pursuing economic structural adjustment， domestic demand is expanding slowly and there is a general excess in production capacity， the increasing supplies of resources and their falling prices are also increasing the pressure of competition in upstream industries. The pressure to reduce production capacity and costs is increasing.

Fourth， the struggle for dominance in international trade and the competition to write the economic rules not only offer a rare opportunity for China to participate in global economic governance and rulemaking，they also produce challenges to the deepening of economic system reform and expansion of market openness. In October 2015， the United States dominated the TPP negotiations. The TPP agreement not only reached an unprecedented high level in market openness and the liberalization and facilitation of trade and investment， it also set new higher standards in areas such as environmental protection， labor standards， competition neutrality， e-commerce and the service industry， including finance. The TPP is playing a demonstration role in the evolution of the international trade and economic rule system. China is now deeply integrated into the worldeconomy. In order to safeguard the development rights and interests of China and other developing countries， it must take the initiative to engage with other countries so they can work together to draw up the multilateral trade and economic rules and push for reform of the international economic governance system. China must actively lead the global economic agenda，increase its institutional voice and push the international economic order to develop in the direction of equality， justice， win-win cooperation. Meanwhile， China should firmly deepen its reform and opening-up to better adapt to economic globalization and the evolution of the global economic and trade system. China should use opening-up to promote reform and development.

Fifth， the complicated and changeable geopolitics and increasing unstable and unclear factors not only pose potential threats to China's economic and social development， but also expand the scope for China in the competition among big powers. As the profound impact of the international financial crisis continues to transmit from the areas of the economy， finance，science and technology and industry to society， politics， military， security and international governance， the strategic games over the global interest pattern are becoming more intense. Geopolitics and power relations are undergoing deep adjustment. There has been a resurgence in terrorism， and hot spots and sensitive issues have frequently emerged. In order to cope with the changes in the external environment， China should not only uphold its principles，handle big power relations carefully， manage and control risks effectively and cultivate a favorable external environment， but also implement a new round of high-level opening-up， push forward the construction of its Belt and Road Initiative， and build a new pattern of opening-up cooperation. China should gain the advantage in development and earnestly safeguard its national and economic security to ensure that the goal of moderately prosperous society will be achieved in a timely manner.

Bi Jiyao is Senior Research Fellow and Director of Institute for International Economic Research， Academy of Macroeconomic Research of the National Development and Reform Commission of China.