A new report from global think-tank ODI explores the impact of China’s ongoing Covid-19 recovery for developing countries.
China’s economy has started to recover from the pandemic, boding well for the global economy. However, the relatively weak external environment, the continued uncertainty regarding the recovery, and other threats to the economic outlook will continue to shape how it acts, both domestically and internationally.
ODI’s Economic Pulse 3: Recover, reform, restructure - China’s outward investment appetite and implications for developing countries, looks at recent macroeconomic data, project announcements, and policy developments, including debt negotiations, to signpost implications for developing economies.
With promising macroeconomic data for the first few months of 2021, China’s recovery appears on track. Both monetary and fiscal policy is expected to support domestic demand, although there will be less stimulus in 2021 compared to 2020, and the central bank will focus on containing financial risks. ODI expects other policies to stimulate internal circulation to be forthcoming, including efforts to improve the business environment, a continued focus on digital services and technology, and other public policies to boost private consumption.
Rebecca Nadin, Director of Global Risks and Resilience at ODI, said:
“ODI’s analysis features special focus sections on two emerging topics to watch: China’s investment in digital infrastructure and Rare Earth Elements.
“Beijing knows that its innovation-driven growth requires secure energy and mineral resources, including rare earths and other technological critical minerals. Expect to see even more emphasis on building up ‘strategic mineral resource reserves’ and expanding exploration, as well as a commitment to taking part in ‘global mineral resource governance’.
“This report notes the overwhelming cost of the necessary pollution cleanup faced by some of China's Rare Earth Elements extraction hubs. This underscores the tricky decisions before developing countries in weighing up the economic opportunities and environmental risks of REE mining.”
Other highlights from the report:
ODI’s researchers do not believe that a focus on domestic reforms and economic restructuring signals a closing off from the world (as some analysts have suggested), but recognise that investments overseas have been more subdued. At the end of 2020, China’s non-financial overseas direct investments (NFODI) totalled $110.2 billion, 5.8% lower compared to the previous year. The more surprising finding was that year-to-date NFODI in 2020 for countries that are part of the Belt and Road Initiative (BRI) was just 4% higher than 2019, after months of seeing year-to-date NFODI in 2020 outpace 2019 by more than 20%.
ODI’s researchers suggest that China’s ambitions for greener development, with its pledge of carbon neutrality by 2060, will also have implications for China’s overseas investments.
Trade with the 140 BRI countries, which suffered because of the pandemic, is now recovering. While exports are expected to face some headwinds in 2021 (as demand for pandemic-related goods declines and goods face more competition as other countries slowly recover), ODI’s report highlights that early trade data for 2021 has been promising. Supporting this outlook, deepening trade relationships and reducing barriers will be at the forefront of Chinese international policy. The outlook is similarly bright for trade in services, where sectors such as tourism and transport were affected the most. Pent-up demand and the slow, yet ongoing, inoculation, in both China and its partners, signal a promising outlook.
A continued focus on developing China-Africa trade deals seems likely. In January, China launched its first Free Trade Agreement with an African country, Mauritius. China can build a stronger relationship with Africa and will look for beneficial trade agreements to build on its existing BRI projects across the continent.
The report notes a potential shift in the modalities of engineering projects that Chinese companies are delivering overseas. There are still many obstacles to a greater shift to PPP project modalities. The report expands on this and includes a detailed summary of China International Contractors Association (CHINCA) members’ mid-term outlook for different regions.
The report also features an expanded analysis of debt negotiation and decision-making structures in China, which will vary by the type of loan and the creditor involved.
China seeks to reaffirm its framing of the BRI as a development assistance initiative. A New White Paper on development cooperation centres the BRI in China’s international development strategy, pushes China’s global governance role and highlights its role in fighting the pandemic. This includes health cooperation, which has been a more central component of China’s engagement with developing countries, and an area in which to expand medical and research cooperation.
The report also includes vital information from the 14th Five Year Plan (FYP), in which for only the second time since the 1990s, China has also articulated planning beyond the traditional five years (short- to medium-term), with its 15-year outlook, Vision 2035.
On supply chains and food security, Covid-19 has dramatically interrupted direct and indirect agricultural supply chains worldwide. There is a potential desire in Beijing to foster enhanced food security via new and deeper external agricultural partnerships.
Beatrice Tanjangco, Lead author and ODI Research Fellow, said:
"ODI’s research identifies key areas likely to impact developing countries in the short term: the outlook for trade given shifts in the external environment, the release of pent-up tourism demand, the refocusing of monetary and fiscal policy from rescuing the economy, and the implementation of the Common Framework for Debt.
“In the long term, as China reforms and restructures, areas that will impact developing countries include the evolution of Chinese domestic demand, appetite for developing partnerships with Africa, a refocus on food security and the implementation of the 14th Five Year Plan and China’s Vision 2035.”
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