China seems to have successfully spurred a ‘modest’ post-pandemic economic recovery amid a myriad of problems, ranging from slump in the real estate sector, stagnant domestic demand, mounting local government debt, deflation, oversupply in some sectors (due to lower exports), soaring youth unemployment and dwindling foreign investment.

That China has defied predictions of economic gloom is good news for the global economy as well as countries like Pakistan that are heavily reliant on Beijing for investments, trade and budgetary support.

Beijing’s economic performance after it lifted the Covid Zero restrictions early last year also impressed the International Monetary Fund to revise China’s GDP growth projection from an earlier five per cent to 5.4pc for 2023, and 4.6pc for 2024, which also represents an increase from its previous estimates.

American investment bank, J.P. Morgan, has described 2023 as a roller-coaster of a year for China. “From a growth perspective, the economy looks set to deliver around 5pc real GDP growth, which is respectable, but slower than the pre-Covid period,” it had noted in a note last month.

Beijing’s economic recovery is good news for Pakistan, given the country’s heavy reliance on its heavyweight neighbour

In December, China’s Central Economic Work Conference (CEWC), considered an economic policy bellwether and the most important policy-making event, set out priorities for 2024, including science and technology innovation, stronger demand, stability, rural development and integration, and low carbon and ecological investment. It concluded that “China’s economy has achieved a recovery, with solid progress made in high-quality development in 2023.”

At the same time, it also conceded that “impediments to recovery remain”, citing inadequate demand, overcapacity in several sectors, weak social expectations and numerous risks and hidden dangers, which need to be overcome to further revive the economy. But it stressed that “favourable conditions outweighing unfavourable factors in China’s developmental landscape, and the fundamental trend of the economic recovery and long-term positive outlook has not changed”.

According to China’s state media, the conference has hinted at ramping up policy adjustments to support an economic recovery during this year. “It is necessary to strengthen counter-cyclical and cross-cyclical (meaning taking action sooner, in smaller steps and with a longer time frame in mind) adjustments of macro policies,” the CEWC said, calling for a balanced pursuit of progress and stability, and advocating for the consolidation of stability through continuous progress.

This means China will “continue to implement a proactive fiscal policy and a prudent monetary policy and strengthen innovation and coordination of policy tools” as Beijing prioritises high-quality development. In other words, Beijing will boost spending and create liquidity in the banking sector to push domestic demand.

It changed its fiscal stance in the third quarter of last year by accelerating spending, helping local governments with their debt problems and announcing stimulus packages for infrastructure investment and housing construction. It has also broken the long-standing 3pc of GDP “glass ceiling” on budgetary deficits.

Analysts expect the fiscal stance to be 1.5-2pc of GDP more expansionary this year, assuming Beijing will set a 3.8pc GDP fiscal deficit target and fully implement the CN¥1 trillion or $140.7 billion infrastructure stimulus to spur stagnant demand.

The CEWC’s priorities focus on scientific and technological innovation to advance a modern industrial system, countering assertions of economic slowdown. Key areas of focus include boosting domestic demand, deepening fiscal and tax reforms, high-level opening in industries such as healthcare and services, and ensuring stability in the financial sector, particularly in the property market.

The CEWC, according to the state media, is not oblivious to the impending challenges that might impair the 2024 goals. Being aware of the situation, it stressed continuing to build a market-oriented, legal and international business environment.

It emphasised the need for more openness to effectively address the obstacles for foreigners to come to China for business, study, and tourism and do a good job in implementing the eight steps to support high-quality Belt and Road cooperation.

When China sneezes

When China sneezes, it is said, Asia catches a cold. Several Southeast Asian economies are already facing pressure as foreign suppliers that grew fat supplying raw materials and machinery to Beijing are confronting lean times on the back of weaker-than-the-expected economic growth in China.

There is no guarantee that this pain will not spill over to other countries and regions if China’s recovery is hampered in the near- to medium-term. The delay in the full recovery of China’s economy is a problem not just for China but also for the entire world.

Even though Pakistan has a negligibly small share in the Chinese supply chains, the Uni­ted Nations Conference on Trade and Development (UNCTAD) in 2020 included it in the list of 20 economies across the world that were affected the most after the world’s second-largest economy suffered slowdown because of novel coronavirus.

Pakistan’s former ambassador and permanent representative to the World Trade Organisation (WTO), Manzoor Ahmed, says, “China imports about $3bn worth of goods for Pakistan while Pakistan’s imports from China are about $23bn. We are not among China’s top 30 export destinations, while China is our second biggest importer.

“Our exports are mostly raw materials such as metals (copper, zinc), about $1bn, textiles (mostly cotton yarn), about $1bnb and agricultural products, including rice. Our exports are low but growing at over 10pc. Any slowdown in China will have some impact on our exports, but not too much. Imports are not likely to be impacted.”

However, he notes that China’s economic slowdown drives down global demand for oil and other commodities, which results in a lowering of their prices. “While Pakistan benefits from lower international oil prices being a net energy importer, it loses export revenues on its commodity exports like rice and yarn.”

Although Beijing has continuously supported Pakistan in its difficult times, he thinks if the Chinese economy doesn’t rebound quickly to pre-Covid levels, the Chinese investments related to the Pakistan Economic Corridor initiative will likely not pick up.

Haroon Sharif, who was a state minister for investment promotion in the Imran Khan government, argues that Pakistan heavily relies on Beijing for budgetary support, infrastructure investments and trade. “Now is the time to encourage business-to-business joint ventures to create jobs and boost exports, both to China and the rest of the world.

“The Chinese companies are looking for joint ventures with credible businesses here to set up factories in different industrial sectors. At least 200 Chinese companies are already operating here and doing very well. But those are focused only on the domestic Pakistani market. We need to encourage business-to-business cooperation in export industries.”

Published in Dawn, The Business and Finance Weekly, January 8th, 2024