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China's Macroeconomic Outlook Post-COVID-19

June 3, 2021

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You can't think of a global power without thinking about China. It's the second-largest global economy, but it's also the largest exporter and has the most prominent exchange reserves in the world. It's even the number one gold-producing country worldwide. However, even China took a hit with the COVID-19 pandemic by having its economic growth slowed to 2.3% compared to 5.8% in 2019.  

Nevertheless, according to the IMF's April 2021 forecast, the GDP trend is expected to rebound to 8.4% in 2021 before starting to slow again next year. China's most immediate challenge is related to the coronavirus's economic, social, and public health impacts, an ageing population and shrinking workforce, the lack of openness of its political system, and credit expansion. There also remains a large equality gap between the living standard of cities and the countryside; between urban zones on the Chinese coast and the interior and western parts of the country; and between the urban middle classes and those that still live off less than USD 1 per day.  

U.S. and Chinese Relations

The last four years of Trump's America were ruled by an "America First" slogan that emphasized American nationalism and unilateralism in international relations. This included a stricter stance on China in various regards, including trade. However, according to a study by Oxford Economics, President Donald Trump's trade war with China caused a peak loss of 245,000 jobs in the U.S. The study also estimated a significant decoupling of the world's two largest economies could shrink U.S. GDP by 1.6 trillion USD over the next five years. The result would be 732,000 fewer jobs in the U.S. in 2022 and 320,000 fewer jobs by 2025.  

Not only that, but the World Trade Organization also ruled that the U.S. violated international trade laws when it imposed tariffs on Chinese goods in 2018 for "national security reasons." Not to mention the more than 35,000 companies that sued the American government, such as Disney and Coca-Cola, during that time. That aside, American firms showed an increased commitment to China from 2017 to 2019, according to a 2020 AmCham Survey. It's also believed that President Joe Biden will be much more collaborative with China. The U.S. will most likely retain a hard line on national security issues such as not making a 5G tower contract with Huawei in the U.S. and possibly having more challenging discussions related to human rights issues and Hong Kong. However, we can still expect most trade talks to start up again and various tariffs to be removed.

China's New Economic Policy

China is aiming to be carbon neutral by 2060. Given that they're the world's largest emitter of CO2 and accounting for close to 30% of global emissions, they're on a path to become more innovative and greener. President Xi's commitment to carbon neutrality by 2060 entails a massive structural change. Cambridge Economics estimates that additional investment in the power sector will be USD 4 trillion over the next 40 years, close to China's GDP in 2020. While China has yet to publish a detailed roadmap to achieving neutrality, there appear to be three margins upon which it can operate. These are:

1. Reducing the energy intensity of GDP as China has become increasingly energy-efficient over time. This means, going forward, they intend to slow down urbanization in part of their declining population and move towards a more service-based economy to reduce their energy intensity.  

2. Reducing the carbon intensity of their energy supply as China currently burns coal for almost 60% of its energy needs. Thus, hydro, nuclear, and renewables will be their new way forward since they are much less polluting. The Tsinghua University projects that fossil fuels share of energy generation will fall from 85% to 13%, nuclear's rise will go from 2% to 19%, and renewables' will jump from 5% to 53%.  

3. Increasing their use of carbon sinks. China will still consume some fossil fuels in 2060, and, given the size of its economy, it will likely emit a significant amount of carbon. Thus, China needs to explore the increased use of carbon sinks; options include carbon capture and storage, reforestation, a greater use of wood in construction, and more sustainable farming techniques.  

All in all, China's policy is reorienting towards supporting innovation and improving the environment. This includes leveraging international partnerships, establishing research centers at home, regionally, and internationally and enhancing core technologies such as 5G and artificial intelligence.  

China's Mining Industry

China takes the number one spot of gold producer in the world by a wide margin. In the past 30 years, there's been a high growth rate, especially in mining and minerals. And there is a huge market for everything, especially in mining. There has been a low- to medium-quality for growth, and it creates a demographic dividend; people work overtime, and there has been a lot of environmental degradation. This is due to their troika in terms of investment, export, and consumption. That's why there's a significant emphasis on technology and innovation, and they're aiming to boost domestic consumption. Although, as mentioned before, there are still plenty of challenges in alleviating poverty and the wealth gap in China.  

China is moving from quantity to quality, from low-end to high-end products, and there's a significant emphasis on technology and innovation. They're trying to boost domestic consumption. They're seeking an immediate boost of "new infrastructure" investment regarding 5G base stations, ultra-high voltage transmissions, intercity high-speed trains and urban railways, big data centers, and artificial intelligence. There won't be a high import dependency for gold, silver, iron, or copper in the next 15 years but more for new energy and ESG commodities such as lithium, nickel, cobalt, rare-ear, PGM, graphite, and uranium. China is also moving quickly with international mergers and acquisitions and outbound mining investment which is set to grow. Chinese mining companies will increasingly become a prominent force in the global mining area. These include Zijin Mining, China Moly, Shandong Gold, and Ganfeng Lithium.

Key Takeaways

Solid and targeted policies have contained the coronavirus and limited economic fallout for China. This is evident with China's economy being fully recovered at the end of 2020, and with growth in 2021 expected to be at 10%. Trump's China policies achieved little, and we can expect President Biden to be more collaborative. With a strong economy and better international relations, it seems unlikely that China will be slowed down any time soon. Instead, we can expect this new decade to be one where China and the world prioritizes innovation and green growth. Now is the best time to bring forward-thinking innovation and tools to China and other countries to move towards a more carbon-neutral society and minimize the damage done to the environment. If you’d like to see how CyanoGuard can help with the green momentum when it comes to the mining industry, contact us today.  

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