Since 2020, the COVID-19 pandemic has spread globally, causing severe damage to national economies, halting trade and personnel exchanges, and pushing industrial chains to the brink of collapse. In response, the US and European economies implemented unprecedented fiscal and monetary expansionary policies to avert economic recession, but this also led to a sharp rise in inflation. During this period, the outbreak of the Ukraine crisis further exacerbated inflation and more importantly, triggered an evolution in the global geopolitical landscape.

 

The global pandemic gradually subsides, global trade and people-to-people exchanges are beginning to recover. One of the most pressing questions in today's global economy is what new trends are emerging, specifically in the performance of major economies, and how China can effectively respond to them.

 

Six Major Trends in the Global Political Economy

Currently, the global political and economic landscape is undergoing profound changes. The economic situation in Europe is particularly severe, especially in Germany and Finland, the two European Union (EU) countries most affected by the Ukraine crisis, which are facing increasing economic downturn pressure. Notably, before the outbreak of the Ukraine crisis, about 80% of the Finnish people voted against joining the North Atlantic Treaty Organization (NATO). However, with the outbreak of the conflict, Finland ultimately changed its position and decided to join NATO. Sweden has always maintained its neutral status, with a policy of neutrality lasting over 200 years, even during World War II. However, in the current international situation, Sweden has also decided to join NATO, reflecting its own security concerns.

 

In summary, the current global political economy exhibits six major trends. First, the accelerating formation of two new blocs after the Cold War. The current global geopolitical situation is complex and volatile, with conflicts intensifying. This is most evident in the ongoing standoff in the Russia-Ukraine conflict, which is gradually pushing the world into two blocs. Countries supporting Russia include North Korea, Iran, and Belarus, while Ukraine is supported by the US, European countries, Japan, Australia, and most other developed countries. Meanwhile, the outbreak of the outbreak of the Palestine-Israel conflict has also exacerbated opposition between the Middle East and the United States and Europe, strengthening the two-bloc global structure.

 

Second, the widening scope of China-US rivalry. The US is not only accelerating its "nearshoring" and "friendshoring" strategies, but also plans to significantly increase tariffs on Chinese products. The author mentioned in "The Impact and Evolution of the China-US Tariff Dispute" (FT Chinese, August 28, 2019) that China is least afraid of a "trade war". Despite a significant decline in China-US trade, China's trade with ASEAN remains active, and exports to the EU continue to grow at a high rate, partially offsetting the contraction in the US market. However, if the China-US rivalry expands into finance, technology, military, and ideology, the pressure on China will increase comprehensively.

 

For example, in the technology sector, the United States has launched a comprehensive "tech war" through legislation and sanctions, particularly targeting semiconductors and chip technology. In the financial sector, the US dominance over the SWIFT system regularly poses the risk of economic sanctions against China. In the military sector, the United States emphasizes maintaining peace and stability in the South China Sea and East China Sea, opposing any unilateral changes to the status quo in the Taiwan Strait. Ideologically, the US insists on promoting universal values, further deepening the divide between the two countries.

 

Third, the widespread practice of monetizing fiscal deficits in developed countries. In response to an unprecedented pandemic crisis, developed countries led by the US have adopted a modern monetary theory policy combining quantitative easing monetary policy and large-scale fiscal expansion, highlighted in the following aspects: The concept of a balanced budget has been broken, and the proportion of debt interest payments to GDP has become a more important indicator of fiscal health than the traditional government leverage ratio and deficit ratio. Central banks' holdings of government debt have increased significantly, with large-scale monetization of fiscal deficits. By the end of 2021, the Federal Reserve held 24% of US Treasury securities, up from just 13% in 2019. The monetary policy framework has shifted, prioritizing growth over inflation in the short term.

 

Recently, the People's Bank of China and the Ministry of Finance held a joint meeting. The biggest change in this round of policy package is the adjustment of fiscal policy, moving towards a more active stance. In this regard, China can draw some insights from the experience of the US, deeply analyzing the effective measures taken by the US in economic policy. In addition, although stimulus policies triggered inflation, the US also took measures to curb inflation, with a cumulative interest rate hike of 525 basis points from March 2022 to July 2023.

 

Fourth, replace of the "Washington Consensus" with industrial policy. Since the 1990s, the "Washington Consensus" has become an important support for the United States to maintain global economic governance, advocating the concepts of "big market, small government", "privatization", and "trade and financial liberalization", while clearly opposing government-led industrial policies.

 

However, the hollowing out of manufacturing industry and the growing trade deficit, along with events such as the COVID-19 pandemic and the Russia-Ukraine conflict, have exposed the risks of over-reliance on external industrial and supply chains. The US is gradually abandoning the notion of an absolutely free market economy. The US gradually realized that it would be difficult for its market economy approach to compete with China's industrial policy-dominated economic system, and begun to learn from China’s industrial policies, attempting to "use their spear to attack their shield".

 

For example, the US introduced the Infrastructure Investment and Jobs Act, CHIPS and Science Act, Inflation Reduction Act, etc., all of which can be seen as products of the shift from the "Washington Consensus". The US National Security Advisor Jake Sullivan also acknowledged in his speech that the US industry and innovation capability have suffered a real blow, and national power should be used to intervene in industrial policy to revitalize manufacturing. This means that China now faces a new competitive environment.

 

Fifth, the restructuring of the global industrial chain. Under the suppression of the US, China's share of the global export market has not declined, but the differentiation is very obvious: Russia, Africa, and Latin America together have become China's largest export regions, ASEAN has become the second-largest, and the share of exports to the US and Europe has dropped significantly. In particular, the proportion of US imports from China has rapidly declined from 21.6% in 2017 to just 13.9% today, with ASEAN, Canada, and the EU filling the gap.

 

As a result, foreign investment in China has declined significantly. According to the Ministry of Commerce, the actual use of foreign capital from January to August this year was 580.19 billion yuan, down 31.5% year-on-year. During this period, the average investment per newly established foreign-funded enterprise dropped to US$1,569, the second-lowest level since 2014. Meanwhile, Chinese enterprises have accelerated their "going global" pace, pushing foreign direct investment to a record high. Chinese enterprises are investing and building factories in regions such as Latin America and Southeast Asia, where China exports a large amount of plant equipment and raw materials, basically restructuring the global industrial chain.

 

Sixth, the digital economy is a new global growth point. China is leading the world in the data economy. According to the report of the China Academy of Information and Communications Technology, China's digital economy has been growing at an annual compound rate of about 14% since 2016, far exceeding the GDP growth rate. As digital transformation enters the stage of scale expansion and in-depth application, its application fields extend from production, research and development to supply chain collaboration and green low-carbon initiatives. Among them, China's intelligent green auto industry is particularly noteworthy. In 2023, China's new energy vehicle production and sales grew by 35.8% and 37.9% year-on-year, respectively. Cumulative exports reached 1.203 million units in 2023, a year-on-year increase of 77.2%, and exports of key components such as power batteries also maintained rapid growth.

 

However, Europe's development in this area has lagged behind, impacted by the Russia-Ukraine conflict and its self-sabotaging policies. The early introduction of the General Data Protection Regulation (GDPR) in Europe has forced many small and innovative enterprises to close down due to high legal costs. Therefore, China must learn from Europe's over-regulation to avoid affecting the survival and innovation of enterprises, thus impeding the development of the digital economy.

 

Significant Divergences in Global Economic Trends

In the US, despite extensive fiscal stimulus during the pandemic, the economy has remained resilient, with very impressive economic indicators. This situation can be attributed to the following factors.

 

First, fiscal subsidies played a key role. After the outbreak of the pandemic, the US government implemented three rounds of direct subsidy measures, amounting to US$2.2 trillion, US$900 billion, and US$1.9 trillion in fiscal aid, benefiting both residents and enterprises. This demonstrates that moderately increasing government leverage can help reduce the debt burden on enterprises and residents. Currently, the US residents and enterprises have high confidence in their future financial situation, precisely because the government has taken on some fiscal burdens, unleashing economic vitality. Therefore, in implementing fiscal policies, the government must make precise trade-offs and balance economic stimulus and risk control.

Second, the rise in asset prices. Driven by large-scale fiscal stimulus, asset prices in the US, especially housing and stock prices, have risen significantly, further enhancing the wealth effect for consumers and driving strong performance in consumption data. In the third quarter of this year, the annualized rate of personal consumption expenditure in the US was 3.7%, the largest increase since the second quarter of 2023.

 

Third, the reshaping of manufacturing. The US government, through substantial subsidies and industrial policy support, has helped reshape the manufacturing sector, becoming a major driver for companies like TSMC to establish factories in the US. This policy not only strengthened the manufacturing base in the US, but also brought more jobs to the domestic economy.

 

Finally, breakthroughs in artificial intelligence technology. Technological breakthroughs in the field of artificial intelligence have occurred mainly in the US, with capital markets playing a crucial role. Without ample capital support, technology-driven innovative companies like OpenAI might struggle to bear the high investment in research and development. The injection of capital provides the necessary guarantee for the vigorous development of these cutting-edge technologies.

 

It appears that the issue with the US economy is not whether it can achieve a "soft landing", but that it has "already landed". In 2023, although nonfarm employment in the United States was revised down by over 800,000, the overall unemployment rate remained at 4.1%, performing relatively well. Historically, during periods of good economic performance, fiscal conditions also tend to improve. However, despite significant economic gains, the issues of fiscal deficit and public debt are becoming increasingly severe. Over the past 40 years, the US federal government's budget shortfall as a percentage of GDP has averaged 3.8% annually, and in 2023, this ratio increased to 6.3%. The total debt scale of the US has exceeded US$35 trillion, accounting for 124% of GDP. This is the biggest issue and risk point for the US at present, worthy of deep reflection.

 

Europe's welfare state is facing severe challenges. Since Russia announced the indefinite shutdown of the Nord Stream 1 pipeline in September 2022, energy prices have surged, forcing the European Central Bank to raise interest rates to curb market demand, particularly in the real estate sector. Housing prices in Finland and Germany fell by 11% and 17%, respectively. Meanwhile, the backlash effect from EU sanctions on Russia has severely impacted many enterprises, with Germany's largest gas importer, Uniper, nearly bankrupt, and soaring electricity prices leading to a significant increase in production costs for enterprises and living costs for residents. Since May, the Purchasing Managers' Index (PMI) in the Eurozone has consistently shown economic weakness.

 

In addition, Europe's excessive focus on "political correctness" has exacerbated its economic challenges. The EU's strict data protection regulations have limited the innovation and growth of the digital economy and platform enterprises, while the "salary cap" and over-regulation of financial institutions have inhibited financial innovation and reduced the appeal for top talent. The flaws in the United Kingdom's pension investment system and restrictions on high-risk investments have intensified capital outflows from the London market. The German government's nuclear phase-out plan has forced the country to rely heavily on nuclear power imports from France, further exposing vulnerabilities in energy security and industrial competitiveness.

Japan's economy has experienced three "lost" decades, the recovery in domestic consumption and rising in income levels are helping Japan escape long-term stagnation. In the third quarter of this year, Japan's real GDP grew by 0.2% quarter on quarter, while personal consumption, which accounts for more than half of Japan's economy, grew by 0.9% quarter-on-quarter. Employee compensation grew by 0.9% year-on-year in real terms, reaching a new high in nearly three years. The rate of wage increases, achieved through labor negotiations was 5.4%, the highest since 1992, which is expected to further stimulate the expansion of real consumption.

 

Japan's inflation rate is also gradually reversing its long-term stagnation. In 2023, the core Consumer Price Index (CPI) rose by 3.1% year-on-year, the highest in 41 years, and has now fallen back to around 2.7%. In 2023, the average price of newly built apartments in the 23 wards of Tokyo increased by 39.4% year on year, surpassing 100 million yen for the first time. Influenced by the long-term trends of industry reshaping and "friend shoring" led by the US, Japan is actively seeking opportunities in the restructuring of key industrial chains, especially in sectors such as semiconductors, and increasing efforts to attract foreign investment.

 

Challenges Facing China's Economy

China's economy is experiencing sluggish growth and faces multiple challenges. First, there was continued weakness in the real estate sector. From January to October 2024, real estate investment declined by 10.3% year-on-year. Over the same period, declines in new construction areas, new home sales, and funds available to real estate companies remained around 20%, despite already low base figures. Despite a series of government policies to stabilize the real estate market, high-frequency data shows that the real estate market has yet to stabilize.

 

Second, local fiscal difficulties have intensified. From January to October 2024, general fiscal revenue fell by 4.7% year-on-year, significantly below the growth target of 2.5% estimated at the beginning of the year. The primary reasons are declining tax revenues and a sharp drop in land sales revenue. At the same time, general fiscal expenditure grew by only 1.0% year on year, also below the 7.9% growth rate projected at the beginning of the year. As land sales revenue fell sharply and debt resolution pressure increased, local governments had to increase non-tax revenue collection, such as fines, penalties, forfeitures, and administrative charges, raising concerns about the business environment and business confidence.

 

Third, there is insufficient consumer demand. Since 2008, the growth rate of total retail sales of consumer goods has been declining. In 2019, before the pandemic, the growth rate was 8.0%, but after the pandemic, the average annual growth rate from 2020 to 2023 dropped to 3.7%, and from January to October 2024, it further decreased to 3.5% year on year. The recovery in consumption is constrained by income, wealth, and expectations. In the first half of 2024, per capita disposable income grew by 4.9% year on year, far below pre-pandemic levels. In major cities, second-hand housing prices fell by around 30% from their peak, and consumer confidence index remained near historical lows, with the employment sub-index hitting a record low.

 

At the end of last year, the Central Economic Work Conference proposed the "two new" policy, primarily aimed at promoting investment through equipment renewal and stimulating consumption through "trade-in". Initially, only 10 billion yuan was allocated for the "trade-in" of consumer goods, but by July this year, fiscal policy further boosted investment, allocating 150 billion yuan in special treasury bonds to support this initiative, which was fully implemented by August, leading to a noticeable market turnaround. Consumers responded enthusiastically to the subsidies, with up to 2,000 yuan available in Beijing, significantly boosting purchases of products such as home appliances. In September, home appliance sales increased by over 20% year on year, and the October data was even stronger, rising by 39.2% year on year, reflecting the gradual effectiveness of the policy.

 

Fourth, the emergence of liquidity traps poses risks. Despite the continued easing of monetary policy, loan demand remains sluggish, showing some characteristics of a "liquidity trap". From January to September 2024, new RMB loans to the real economy fell to a new low in the same period of nearly five years. At the same time, there is still significant downward pressure on prices. In October, the CPI rose by only 0.3% year on year, and core CPI increased by just 0.2%. Prices of consumer goods such as cars, mobile phones, and household appliances remained low. Therefore, the priority is to address the issue of price decline. Whether through "printing money" or fiscal expansion, it is essential to stop the downward trend in prices to adjust market expectations.

 

Fifth, corporate profits are weak. Due to insufficient effective demand, natural disasters, and other factors, from January to September 2024, profits of industrial enterprises above designated size fell by 3.5% year on year. Meanwhile, the operating profit margin for industrial enterprises was 5.27%, the lowest since 2013. The number of loss-making enterprises and the amount of losses increased year on year, and the proportion of loss-making enterprises increased to 3.9%. Furthermore, the average period of turnover of receivables for industrial enterprises reached 66.3 days, a record high for the same period.

 

Changes Brought about by A Raft of Incremental Policies

In response to the current situation, the central government has quickly launched a package of incremental policies, and the market has reacted positively.

First of all, monetary policy has played an important role in stabilizing the real estate market and the stock market, with the A-share index rebounding from a low of 2,700 points. During this year's National Day holiday, mainland tourists visiting Hong Kong not only increased in number, but also became more willing to spend, with stronger demand for high-end restaurants, reflecting a recovery in consumer confidence.

 

Next, this round of fiscal stimulus has seen some innovative measures: Local government bond policies have become more flexible, no longer relying solely on "selling off assets". Additionally, governments have injected capital into banks to stabilize the financial system. Third, the scope of local government bond usage has been expanded, with 3.9 trillion yuan of previously underutilized local government bond funds now used for land and existing housing acquisitions, thereby increasing local fiscal revenue, with an expected investment of 2 trillion yuan in the coming months. Fourth, market perception has clearly improved. The introduction of the "trade-in" policy is essentially a stimulus measure in the form of a consumption voucher. In October, automobile consumption grew by 16%, and new energy vehicles increased by 45%, closely related to the subsidy policy.

 

For stimulus policy, there are the following suggestions. First, it is recommended to continue to maintain the subsidy scale of 150 billion yuan next year, which will not only effectively improve liquidity, but also help the overall economic recovery. Second, it is suggested to distribute cash directly to key groups, including college students, grassroots civil servants, rural low-income families, and other low-income groups. Among them, civil servants are key to grassroots governance and should receive increased subsidies rather than salary cuts. Meanwhile, consideration can be given to providing appropriate capital injections or support to high-quality private real estate enterprises to assist the industry's recovery.

 

SHEN Jianguang is the Chief Economist of JD.COM