Notes
I plan to re-evaluate my core assumptions toward US-China relations, China, and the geopolitical risk associated with rising US-China tensions.
Outlining China’s core economic headwinds:
China’s overall unemployment rate is 5.7%, and the youth unemployment rate is reported to be roughly 20%, according to China’s National Bureau of Statistics.
How will China resolve youth unemployment?
Understanding whether Chinese authorities feel unemployment levels fall into an acceptable range is essential. Fundamentally, employment serves to preserve economic and social stability.
Even if China’s youth unemployment remains stuck at 20%, Chinese authorities likely expect that either:
unemployment levels are manageable at these levels, or
unemployment rates at their current levels are not structural
Beyond unemployment, China faces deeper structural headwinds rooted in its reliance on growth fueled by state-backed infrastructure and real estate investment.
China chooses to rely more on macroprudential and fiscal tools over monetary policy. Superficially, China’s central bank, the People’s Bank of China (PBOC), still appears to have room to cut its Loan Prime Rate. Reducing the loan primate rate merely injects liquidity into the state-owned banking system, which lacks mechanisms to allow that liquidity to reach the real economy.
While China has the ability to facilitate macro-level intervention over the course of 2023, authorities are likely expecting not to have to rely too heavily on these tools if they expect the Omicron variant’s impact on economic growth to be limited.
China Economy
China to boost spending in 2023 economic revival drive, top planner says (South China Morning Post)
China’s top economic planner aims to help boost domestic consumption and woo more foreign investors this year as it seeks to revive the country’s Covid-hit economy.
In a People’s Daily interview published on Sunday, Zhao Chenxin, deputy chairman of the National Development and Reform Commission (NDRC), said authorities would align fiscal, monetary, industrial, technology and social policies to promote growth.
China’s Young Elite Clamber for Government Jobs. Some Come to Regret It. (New York Times)
Nearly one in five people between the ages of 16 and 24 in China are unemployed. Alibaba, Tencent and other tech firms have laid off workers. Economic growth has been battered by a sharp real estate slump, and small businesses suffered under the Covid restrictions, which paralyzed large parts of the country for weeks or months at a time. The “zero Covid” policy has been scrapped, but the economy is not expected to quickly snap back.
How Effective Are Macroprudential Policies in China? (International Monetary Fund)
This paper investigates macroprudential policies and their role in containing systemic risk in China. It shows that China faces systemic risk in both the time (procyclicality) and crosssectional (contagion) dimensions. The former is reflected as credit and asset price risks, while the latter is reflected as the links between the banking sector and informal financing and local government financing platforms. Empirical analysis based on 171 banks shows that some macroprudential policy tools (e.g., the reserve requirement ratio and house-related policies) are useful, but they cannot guarantee protection against systemic risk in the current economic and financial environment. Nevertheless, better-targeted macroprudential policies have greater potential to contain systemic risk pertaining to the different sizes of the banks and their location in regions with different levels of economic development. Complementing macroprudential policies with further reforms, including further commercialization of large banks, would help improve the effectiveness of those policies in containing systemic risk in China.
China’s Monetary and Macroprudential Policies: Are They Complementary or Substitutive? (CESifo Economic Studies)
This paper develops a calibrated dynamic stochastic general equilibrium model incorporating a banking sector and some unique features of China’s macroeconomic policies to simulate China’s monetary and macroprudential policies. The quantitative results show, first, that the interest rate is a better instrument for China’s monetary policy than the required reserve ratio (RRR) when the central bank is solely concerned about price stability; second, that the loan-to-value ratio is a very useful macroprudential tool for China’s financial stability, and the RRR could be used as an instrument for both objectives; third, monetary and macroprudential policies could be either complements or substitutes in China, depending on the choices of instruments for the two policies. Our policy experiments recommend three combination choices of instruments for China’s monetary and macroprudential policies.
China’s Employment Policies and Strategies (OECD)
The Chinese government attaches great importance to the issue of employment, and takes employment as the first priority of people’s livelihood and as the top strategy for ensuring the stability of its society. Proceeding from the national conditions, the Chinese Government has explored and drawn on international experiences in its practice, gradually improves its relevant legal system, and formulated and implemented a set of proactive employment policies.
US-China Relations
New China Foreign Minister Seeks Better US Ties in Blinken Call (Bloomberg)
New Chinese Foreign Minister Qin Gang sought better Sino-US ties in a phone conversation with Secretary of State Antony Blinken on New Year’s Day, according to a statement from the Ministry of Foreign Affairs in Beijing.
China Pandemic Policy
Some in China return to regular activity after COVID infections (Reuters)
Some people in the Chinese cities of Beijing, Shanghai and Wuhan braved the cold and a rise in COVID-19 infections to return to regular activity on Monday, raising the prospect of a boost to the economy as more recover from infections.
Among those who gathered to sled or ice skate on a frozen lake in the capital's Shichahai Lake Park, some were upbeat about the opening-up after China dropped stringent "zero-COVID" measures on Dec. 7 to adopt a strategy of living with the virus.
Geopolitics
Japan says it scrambled jets to monitor Chinese aircraft carrier operations (Reuters)
Japan said on Monday it scrambled jet fighters and dispatched aircraft and warships over the past two weeks to keep tabs on China's Liaoning aircraft carrier and five warships that conducted naval manoeuvres and flight operations in the Pacific.
Japan monitored the operations after the Chinese naval group, which included missile destroyers, sailed between the main Okinawa island and Miyakojima island into the Western Pacific from the East China Sea on Dec. 16, Japan's Ministry of Defence said in a press release.