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Maritime Transhipment lines: Congested South VS Strategic North

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Improved connectivity, especially through transport links, is an essential condition for economic growth. Transport links not only provide physical access to resources, but also enable producers to take advantage of opportunities in domestic and foreign markets, leading to economies of scale and specialization.

In the conditions of a market economy, the need to improve the quality of transport services using advanced transportation technologies and the provision of fundamentally new competitive transport services comes to the fore. This is primarily due to the presence of real competition between different modes of transport.

Transportation logistics between Far East and Western Europe is vital for world’s economic development, but today we do not have reliable technologies and transport lines. Due to this it is necessary to think on few aspects, which may determine the development of environmentally friendly economies in future:

  • reliable transportation (safe and environmentally friendly) ;
  • cheapest modes and transhipment lines;
  • fastest modes of transportation

The cheapest mode of transportation is by the sea, but it also has some pros and cons.

Currently about 98% of mutual Far East – West Europe deliveries are made by maritime transport, with aviation transport and railway transport accounting for 1.5 – 2% and 0.5 – 1%, respectively. Approximately 80% of Far East – West Europe cargoes are carried in containers, including about 90% of cargoes brought to West Europe from the Far East (imports) and 70 – 75% of cargoes carried from the West Europe to the Far East (exports).

Figure 1. Transhipment lines from Far East to Western Europe. Source : IFIMES, 2021.

This data shows that investment in rail infrastructure is leading to rail being a viable alternative to both sea and air for trade between the Far East and Europe.

On a global scale, sea transport delivers over 80% of all world cargo. In fact, sea transportation plays a major role in world trade. In addition, from an economic point of view, this is the most efficient and inexpensive way to transport cargos.

Maritime routes are corridors of a few kilometres in width connecting economic regions and overcoming land transport discontinuities. International maritime shipping routes are forced to pass through specific locations corresponding to passages, capes, and straits. These routes are generally located between major markets such as Western Europe, North America, and East Asia, where an active system of commercial trade is in place.

Figure 2. Northern shipping. Major transport routes through the Arctic. Source: Centre Port Canada, 2008.

To date, there are several maritime transhipment routes that create a global transport logistics chain:

  • The busiest North Atlantic route connects the ports of the Atlantic coast of America with the ports of Western Europe
  • The second busiest route passes through the Suez Canal.
  • The third busiest route is through the Panama Canal.
  • West African routesconnect the Atlantic ports of Europe, North and South America via the Cape of Good Hope with the West and South – East coast of Africa. Super tankers with oil from the Middle East to Europe follow the same route.
  • South American routes through the Strait of Magellanconnect Europe and the Atlantic coast with Brazil, Uruguay, and Argentina.
  • Routes in the North Pacific Oceanconnect the Pacific coast of the USA and Canada with Japan and China.
  • Routes through Honolulu, Samoa, and the Fiji Islands, and through Tahiti and the Society Islandsconnect the Pacific coast of the USA with New Zealand and Australia.
  • The Northern Sea Route

This unique transport artery is the shortest shipping route between Europe and Asia.

The mentioned maritime transhipment routes create for global freight circulation and in part because of the economic activities and resources they grant more efficient access to.

Figure 3.: Main Maritime Shipping Routes and Chokepoints. Source: Port Economics, Management and Policy, Dr. Jean-Paul Rodrigue, Dept. of Global Studies & Geography, Hofstra University, n.d.

Thus, the warm waters (red) shipping line from Far East to the port of Rotterdam in Netherlands for the delivery of goods to the Balkan Peninsula, which lies at the intersection of transit communications in Europe, Asia, and Africa, today has great logistics prospects. Currently, 80% of cargo from Far East to Europe goes through the Atlantic ocean to the ports of Northern Europe. The warm waters shipping line through the Arabian sea and the Suez canal to the Balkans reduces the transport time by 7 – 10 days: this is so far the shortest sea route from Far East to Europe (however, to do this, CEE needs to build transport infrastructure, which the region has a huge need for. This is especially true for the Balkan Peninsula, which has entered a period of stable development after riots and wars that caused serious damage to infrastructure). Thus, the cheapest in the cost, this transshipment line is not beneficial in terms of second criteria – timeframe (See Figure 1).

Presenting great opportunities for global shipment, the Southern Seas create vital shortcuts via highly congested chokepoints (See Figure 3), namely:

  • The Straits of Malacca and Singapore – the shortest route between the Pacific and Indian Oceans;
  • The Phillips Channel in the Singapore Strait;
  • the South China Sea – crucial shipping lane and a region subject to contention since oil and natural gas resources are present;
  • The Cook Strait is located between the two main islands that comprise New Zealand;
  • The Strait of Bab-El-Mandeb – the shortest trade route between the Mediterranean region, the Indian Ocean, and the rest of East Asia;
  • The Strait of Hormuz links the Persian Gulf with the Arabian Sea and the Gulf of Oman;
  • The Suez Canal (Including Gubal Strait) ) provides the shortest route between the Atlantic and Indian oceans;
  • The Cape Good Hope represents the extreme tip of Africa separating the Atlantic and Indian oceans;
  • the Strait of Gibraltar connects the Atlantic Ocean and the Mediterranean Sea;
  • The Bosporus and Dardanelles Straits separate the Sea of Marmara from the Aegean and Black Seas;
  • The Strait of Dover connects the Baltic and North Seas;
  • The Oresund Strait is a passage of 115 km between Denmark and Sweden connecting the North Sea and the Baltic;
  • The Danish Straits are a system of straits between the Scandinavian and Jutland Peninsulas;
  • The Panama Canal is the main crossing point between the Atlantic Ocean and the Pacific Ocean;
  • The Strait of Magellan is used to be the only way to get from the Atlantic Ocean to the Pacific Ocean;
  • The Strait of Florida isserving as the main connection between the United States and all points to the south and west;
  • The St. Lawrence River is a major waterway in North America, flowing through the United States and Canada and connecting the Great Lakes with the Atlantic Ocean.
Figure 4.: The Northern Sea Route and the Northern Transport Corridor. Source: The Northern Sea Route: Dreams and Reality in the Far North. Marlene Laruel, Lecturer at George Washington University (USA) [Solkovo, 2020].

Apart from being vital for global trade, disruption of trade flows through any of these chokepoints could have a significant impact on the world economy. Many of the bottlenecks are located next to politically unstable countries, increasing the risk of compromising their access and use, such as through piracy. Closures are a rare instance that have only taken place in war situations as one proponent prevented another from accessing and using the chokepoint (e.g., Gibraltar and Suez during World War II). Closure of a maritime chokepoint in the current global economy, even if temporary, would have important economic consequences with the disruption of trade flows and even the interruption of some supply chains (e.g., oil). These potential risks and impacts are commonly used to justify using military naval assets to protect sea lanes, even if such benefits are difficult to demonstrate.

Global warming is causing vast perennial ice sheets to melt, resulting not only in an environmental threat but also in the opening of economic opportunities.

Thus, another waters shipping line (cold waters – blue line), which emerged as a result of the rapid melting of the North polar icecap, opens the prospects of shortened transport waterways in the ice-free areas. There are basically three possible routes, each of significance:

Geographically the position of the North waterways is very beneficial. The Northwest Passage connects the Atlantic and Pacific along the northern coast of North America through the Arctic waters from the Davis straits and Baffin Bay all the way to the Bering Sea shortens the distance between Far East Asia and the American East coast (via Panama) by approximately 7,000 kilometers.

The North East Passage, which connects the Atlantic coast of Western and Northern Europe with the Pacific coast of Northeast Asia via the Russian Arctic coastline, is cutting the distance between the edges of two continents, making it shorter by about 40% in comparison to the traditional, warm seas transport routes via the Suez or Panama Canal.

Figure 5.: The Inshore zones of the Northern Sea Route. Source: Created by Author (IFIMES), 2021

The Arctic Bridge is a seasonal route which shortens the connection between the North American and European continents via the Arctic Ocean. Nevertheless, the observation shows that the transshipment route between the North Atlantic and the Pacific Ocean straight over the Central Arctic Ocean (the so-called Arctic Bridge) might be in reach earlier than expected due to climate change.

Thus, in terms of logistics, the cold waters shipping line (blue) will allow to deliver cargo to West Europe by sea faster than the 48 days (that it takes on average) to travel from the Northern ports of Far East to Rotterdam via the Suez canal, considering that the passage of a cargo ship along the North sea route is 2.8 thousand miles shorter than the route through Suez canal (See Figure 1).

The criteria of reliability also plays a positive role. Analyzing and estimating of the CO2 emissions directly resulting from transport between Far East and the West Europe by air, sea and rail, it has been assumed that carrying a TEU by container ship results in emissions of around 0.5 tonnes of CO2. These emissions might fall in future, if the average value of goods sent by sea, fell, and if this resulted in ships sailing at lower and more efficient speeds.

Among the advantage of Northern Seas transhipment lines, one should consider a significantly lower risks of physical loss of cargo (due to the peculiarities of the climate of the Indian Ocean, through which the southern route passes). Tropical storms of the Indian Ocean, which cause significant destruction, and sometimes sinking of cargo, lead to significant financial losses, and sometimes to the loss of a deal with the buyer. Such tropical cyclones occur during the typhoon season and last for more than six months: from May to November. The climatic features of the southern route suspend the navigation of the canal for as long as 6 months, creating unsafe and in some cases unprofitable conditions for transport companies. There are no storms in the sea expanses of the Northern Sea Route almost all year round, this is facilitated by the ice cover, which restrains water fluctuations. Thus. the stormy conditions of transportation of the northern seas are incomparable with the destructive storms of the South.

Another advantage, which play into the hands of the blue transhipment routes is the decrease of using of harmful to the environment material – cement. Building new land infrastructure (especially roads) requires cement, a material that contributes more than 6% of global carbon emissions. Shifting the transportation mode to the sea, therefore, will reduce the amount of roads constructions on the land.

It is estimated that cargo, currently carried by maritime and air (white shipping  line) modes between Europe and the Far East, will in future shift to rail as a result of improved services attributed to the transhipment routes. It is indicated that around 2.5 million TEUs could transfer to rail from maritime transport, and 0.5 million from air transport, by 2040, which is equivalent to 50 to 60 additional trains daily, or 2 to 3 trains per hour, in each direction. In regards with the environmental issue, this means that, if maritime services lose their most time-sensitive cargo to rail, they might in practice sail their ships slower, extending transit times but reducing fuel costs and hence prices, and decreasing greenhouse gas emissions.

In addition to the time-frame criteria, a cold-water shipping line is beneficial in terms of capacity. It is usually characterized as the shortest sea route between West Europe and Far East, the safest (e.g., the problem of Somali pirates) and has no restrictions on the size of the ship, unlike the route through the Suez Canal. Current data makes it clear that the cold-water transhipment line will allow to deliver cargo to Europe faster by sea, reducing the route by 20 – 30%, and hence being more environmentally friendly (by using less fuel and decreasing CO2 emission) and saving human resources. Nevertheless, to capitalize on that opportunity requires much work in terms of improved navigation procedure and installation of safety-related infrastructure.

Figure 6.: Map of potential routes between Shanghai and Rotterdam. Source: Created by Author (IFIMES), 2021

But in order to use the energy potential of the Arctic, the countries of the region are making additional efforts to develop the main transhipment routes of the North, and one of them – the Northern Sea Route – has great prospects.

The Northern Sea Route is the shortest sea route between the European part of Russia and the Far East; it passes through the seas of the Arctic Ocean (Barents, Kara, Laptev, East Siberian, Chukchi) and partly the Pacific Ocean (Bering) (See Figure 4).

The length of the route from St. Petersburg to Vladivostok via the NSR is only 14.000 km, while on the more popular route through the Suez Canal it is more than 23.000 km. Also, this route is advantageous in terms of delivery time and route length for many countries of the East Asian region to the countries of Western and Northern Europe. For example, the distance from the port of Rotterdam in Europe to the port of Yokohama in Japan via the Suez Canal exceeds 11.100 nautical miles, while the length of the route along the Northern Sea Route is only 7.000 nautical miles, that is, more than 37% shorter. The Northern Sea Route is also beneficial to other ports, for example, the route from Hong Kong, Shanghai, and Busan (South Korea) to Rotterdam is shorter by 11%, 24% and 29%, respectively (See Figure 5).

Though conditions are better along the NSR than elsewhere in the Arctic, major improvements are still needed in support of navigation as well as better communication considering increasing trans-Arctic traffic on the NSR.  Thus, the NSR will be most effectively used together with a network of high-speed railways connecting the east and west of the country and providing access to the deep regions of Russia to the ports of the Arctic and Pacific Oceans (See Figure 5). The NSR and the supporting frame of railways are also important for strengthening the transport connectivity of the continents.

Already in 2020, the Russian authorities were intended to increase the volume of cargo transportation along the NSR to 40 – 43 million tons of cargo. According to the decree of President V. Putin, in 2024, the level of transportation should reach 80 million tons. Under favourable circumstances, by 2030 the size should exceed 100 million and amount to about 120 million tons. The growth is planned to be ensured by the beginning of the supply of Taimyr coal to India. After 2030, there are several plans to significantly increase the volume of international transit traffic through the Northern Sea Route.

In the American part of the Arctic region, the construction of the northern components of fixed transportation link in Alaska and Canada opens up development programs with massive international implications, linking the United States with East Asia in the creation of a high-technology, fusion- and fission-powered backbone for a new world economy.

The proposed Alaska – Alberta (A2A) rail corridor will connect the US state of Alaska with Alberta, Canada. The route will link the deep-water ports and the existing railway network of Alaska to the Canadian railway system

Apart from this, considering the current development of logistics routes in Eurasia, the issue of building the Eurasia – America transport corridor via the Bering Strait, which is the missing link in the global transport system, is of crucial importance for the further development of the world economy in the context of globalization.

Thus, the development of a new logistics hub of the world’s transcontinental routes will contribute to a significant increase in the economic well-being of the regions of the Far East, Eurasia, and North America, which will receive additional infrastructure and economic development (See Figure 6). In addition, with the help of the new road network, the development and trade of minerals from the Far East to other regions of the world will be simplified.

Equally important are the initiatives of the countries of Northern Europe and China in the development of transport logistics of the North, which ultimately aims to link the railway network of Eurasia (Russia, Chinese BRI and European TEN-T) with the maritime transport artery of the Northern Seas.

While there is a stable fixed ling between Sweden and Denmark (the 16-kilometer-long Øresund Link between Malmo, Sweden (right), and Copenhagen, Denmark (left), was completed and opened to traffic in 2000),the stable transportation connection across the entire Scandinavia is not fully developed (especially in the Gulf of Bothnia and Baltic Sea), creating a gap between the countries of North Sea and Baltic states.To fulfil this missing part of the logistic chain, North European countries are considering the creation of new transportation fixed links in the region:

  •  the “HH Tunnel” between Denmark and Sweden;
  • The Arctic railway line with the “Arctic Link” to China via NSR to the Northern Europe;
  • The Artic Railway to boost railway connectivity North Europe;
  • The Pol-Corridor fixed link;
  • The International North – South Transport Corridor (hereinafter INSTC) from Finland to Norway and further South;
  • The Helsinki – Tallinn undersea tunnel between Finland and Estonia;
  • The Nordic Logistic Corridor (NLC);
  • Baltic Sea Bridge within Kvarken Multimodal Linkbetween Sweden and Finland;
  • The Rail Baltica railway project to enhance railway links between the Baltic States and Central Europe;

Today, China is investing a lot of money in the development of Greenland. In 2017, Shanghai-based Shenghe Resources bought a 12.5% stake in Greenland Minerals and Energy A/S, becoming its largest shareholder and getting the right to increase its stake in the flagship project of the Greenland uranium mining company in Kwanefjeld to 60%.

Another Arctic country, Iceland, enjoys special attention from China as well. Iceland’s central location in the northern hemisphere makes it an ideal northern entrance to Europe from East Asia, similar to the prosperity of the port of Piraeus in Greece, which in a few years should handle up to 6.2 million TEU per year, which will make it one of the five largest ports in Europe. Over time, Iceland may become the same transhipment hub in the Atlantic Arctic, expanding the infrastructure according to needs, as the international shipping network expands through Arctic routes.

China is also actively exploring the transhipment possibilities in the Arctic Ocean basin. Thus, the climatic motivating factor for China in the development of the Arctic using the Trans-Arctic Sea route (hereinafter TSR) is mentioned by many experts, linking it with economic benefits. The Northern Sea Route is a gold mine, with access to which China will be able to increase its exports not only to already established partner countries, but also will have the opportunity to discover new trade chains.

Apart from “Arctic powers”, climate change also opens up additional prospects for the development of the NSR. Thus, if global warming is happening and will continue in the coming years, then the amount and thickness of ice cover in the seas of the Arctic Ocean should decrease. According to the forecasts of Norwegian scientists, by 2080 there may be no ice left in the Arctic seas at all.

Thus, it can be seen that for now the most beneficially in terms of the time-fame is the land (green) shipping line, due to the fact that current Maritime (warm waters – red) transport delivery speeds remain rather low (including those of modern container ships). (Vessels travelling along the Far East – West Europe route run at 20 – 25 knots, while average total travel time, including the Suez Canal passage and port calls, is 35 – 45 days. Besides, there always remains the risk of delays for natural and other reasons (such as waiting for loading at the port of departure)). This gives certain advantages to the cold waters (blue) transhipment line in terms of time-frame, regularity and precision of delivery (See Figure 1), which will dramatically reduce the time between Far East and Europe consumer markets. But to reach consensus in timing, price and environmentally friendly standards the growing push to decarbonize economies, implement the green construction methods should be done. Unfortunately, this approach may take decades to be adopted, which our planet may not have. And understanding of this fact should underlie the development to all the countries of the Globe without exceptions. It is vital to understand, that thinking on global warming issue we should consider all the possible ways of decreasing greenhouse gas emissions and overcome this challenge. We can no longer continue to live in denial of climate change and its impact on our lives the future of our generations.

Dr. Maria Smotrytska is a senior research sinologist and International Politics specialist of the Ukrainian Association of Sinologists. She is currently the Research Fellow at International Institute for Middle East and Balkan Studies (IFIMES), Department for Strategic Studies on Asia. PhD in International politics, Central China Normal University (Wuhan, Hubei province, PR China) Contact information : officer[at]ifimes.org SmotrM_S[at]mail.ru

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Economy

2022: Small Medium Business & Economic Development Errors

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Calling Michelangelo: would Michelangelo erect a skyscraper or can an architect liberate David from a rock of marble? When visibly damaged are the global economies, already drowning their citizenry, how can their economic development departments in hands of those who never ever created a single SME or ran a business, expect anything else from them other than lingering economic agonies?

The day pandemic ends; immediately, on the next day, the panic on the center stage would be the struggling economies across the world.  On the small medium business economic fronts, despite, already accepted globally, as the largest tax contributor to any nation. Visible worldwide, already abandoned and ignored without any specific solutions, there is something strategically wrong with upskilling exporters and reskilling manufacturers or the building growth of small medium business economies. The SME sectors in most nations are in serious trouble but are their economic development rightly balanced?   

Matching Mindsets: Across the world, hard working citizens across the world pursue their goals and some end up with a job seeker mindset and some job creator mindset; both are good. Here is a globally proven fact; job seekers help build enterprises but job creators are the ones who create that enterprise in the first place. Study in your neighborhoods anywhere across the world and discover the difference.

Visible on LinkedIn: Today, on the SME economic development fronts of the world, clearly visible on their LinkedIn profiles, the related Ministries, mandated government departments, trade-groups, chambers, trade associations and export promotion agencies are primarily led by job seeker mindsets and academic or bureaucratic mentality. Check all this on LinkedIn profiles of economic development teams anywhere across the world.

Will jumbo-pilots do heart transplant, after all, economic performance depends on matching right competency; Needed today, post pandemic economic recovery demands skilled warriors with mastery of national mobilization to decipher SME creation and scalability of diversified SME verticals on digital platforms of upskilling for global age exportability. This fact has hindered any serious progress on such fronts during the last decade. The absence of any significant progress on digitization, national mobilization of entrepreneurialism and upskilling of exportability are clear proofs of a tragically one-sided mindset.

Is it a cruise holiday, or what? Today, the estimated numbers of all frontline economic development team members across 200 nations are roughly enough to fill the world-largest-cruise-ship Symphony that holds 6200 guests. If 99.9% of them are job-seeker mindsets, how can the global economic development fraternity sleep tonight? As many billion people already rely on their performances, some two billion in a critical economic crisis, plus one billion starving and fighting deep poverty. If this is what is holding grassroots prosperity for the last decade, when will be the best time to push the red panic button? 

The Big Fallacy of “Access to Finance” Notion: The goals of banking and every major institution on over-fanaticized notions of intricate banking, taxation are of little or no value as SME of the world are not primarily looking for “Access to Capital” they are rather seeking answers and dialogue with entrepreneurial job creator mindsets. SME management and economic development is not about fancy PDF studies of recycled data and extra rubber stamps to convince that lip service is working. No, it is not working right across the world.

SME are also not looking for government loans. They do not require expensive programs offered on Tax relief, as they make no profit, they do not require free financial audits, as they already know what their financial problems are and they also do that require mechanical surveys created by bureaucracies asking the wrong questions. This is the state of SME recovery and economic development outputs and lingering of sufferings.

SME development teams across the world now require mandatory direct SME ownership experiences

The New Hypothesis 2022: The new hypothesis challenges any program on the small medium business development fronts unless in the right hands and right mindsets they are only damaging the national economy. Upon satisfactory research and study, create right equilibrium and bring job seeker and job creator mindsets to collaborate for desired results. As a start 50-50, balances are good targets, however, anything less than 10% active participation of the job creator mindset at any frontline mandated SME Ministry, department, agency or trade groups automatically raises red flags and is deemed ineffective and irrelevant. 

The accidental economists: The hypothesis, further challenges, around the world, economic institutes of sorts, already, focused on past, present and future of local and global economy. Although brilliant in their own rights and great job seekers, they too lack the entrepreneurial job creator mindsets and have no experience of creating enterprises at large. Brilliantly tabulating data creating colorful illustrative charts, but seriously void of specific solutions, justifiably as their profession rejects speculations, however, such bodies never ready to bring such disruptive issues in fear of creating conflicts amongst their own job seeker fraternities. The March of Displaced cometh, the cries of the replaced by automation get louder, the anger of talented misplaced by wrong mindsets becomes visible. Act accordingly

The trail of silence: Academia will neither, as they know well their own myopic job seeker mindset. In a world where facial recognition used to select desired groups, pronouns to right gatherings, social media to isolate voting, but on economic survival fronts where, either print currency or buy riot gears or both, a new norm; unforgiveable is the treatment of small medium business economies and mishmash support of growth. Last century, laborious and procedural skills were precious, this century surrounded by extreme automation; mindsets are now very precious.  

Global-age of national mobilization: Start with a constructive open-minded collaborative narrative, demonstrate open courage to allow entrepreneurial points of views heard and critically analyze ideas on mobilization of small mid size business economies. Applying the same new hypotheses across all high potential contributors to SME growth, like national trade groups, associations and chambers as their frontline economic developers must also balance with the job creator mindset otherwise they too become irrelevant. Such ideas are not just criticism rather survival strategies. Across the world, this is a new revolution to arm SME with the right skills to become masters of trade and exports, something abandoned by their economic policies. To further discuss or debate at Cabinet Level explore how Expothon is making footprints on new SME thinking and tabling new deployment strategies. Expothon is also planning a global series of virtual events to uplift SME economies in dozens of selected nations.

Two wheels of the same cart: Silence on such matters is not a good sign. Address candidly; allow both mindsets to debate on how and why as the future becomes workless and how and why small medium business sectors can become the driving engine of new economic progress. Job seekers and job creators are two wheels of the same cart; right assembly will take us far on this economic growth passage. Face the new global age with new confidence. Let the nation witness leadership on mobilization of entrepreneurialism and see a tide of SME growth rise. The rest is easy.

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Rebalancing Act: China’s 2022 Outlook

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Authors: Ibrahim Chowdhury, Ekaterine T. Vashakmadze and Li Yusha

After a strong rebound last year, the world economy is entering a challenging 2022. The advanced economies have recovered rapidly thanks to big stimulus packages and rapid progress with vaccination, but many developing countries continue to struggle.

The spread of new variants amid large inequalities in vaccination rates, elevated food and commodity prices, volatile asset markets, the prospect of policy tightening in the United States and other advanced economies, and continued geopolitical tensions provide a challenging backdrop for developing countries, as the World Bank’s Global Economic Prospects report published today highlights.

The global context will also weigh on China’s outlook in 2022, by dampening export performance, a key growth driver last year. Following a strong 8 percent cyclical rebound in 2021, the World Bank expects growth in China to slow to 5.1 percent in 2022, closer to its potential — the sustainable growth rate of output at full capacity.

Indeed, growth in the second half of 2021 was below this level, and so our forecast assumes a modest amount of policy loosening. Although we expect momentum to pick up, our outlook is subject to domestic in addition to global downside risks. Renewed domestic COVID-19 outbreaks, including the new Omicron variant and other highly transmittable variants, could require more broad-based and longer-lasting restrictions, leading to larger disruptions in economic activity. A severe and prolonged downturn in the real estate sector could have significant economy-wide reverberations.

In the face of these headwinds, China’s policymakers should nonetheless keep a steady hand. Our latest China Economic Update argues that the old playbook of boosting domestic demand through investment-led stimulus will merely exacerbate risks in the real estate sector and reap increasingly lower returns as China’s stock of public infrastructure approaches its saturation point.

Instead, to achieve sustained growth, China needs to stick to the challenging path of rebalancing its economy along three dimensions: first, the shift from external demand to domestic demand and from investment and industry-led growth to greater reliance on consumption and services; second, a greater role for markets and the private sector in driving innovation and the allocation of capital and talent; and third, the transition from a high to a low-carbon economy.

None of these rebalancing acts are easy. However, as the China Economic Update points out, structural reforms could help reduce the trade-offs involved in transitioning to a new path of high-quality growth.

First, fiscal reforms could aim to create a more progressive tax system while boosting social safety nets and spending on health and education. This would help lower precautionary household savings and thereby support the rebalancing toward domestic consumption, while also reducing income inequality among households.

Second, following tightening anti-monopoly provisions aimed at digital platforms, and a range of restrictions imposed on online consumer services, the authorities could consider shifting their attention to remaining barriers to market competition more broadly to spur innovation and productivity growth.

A further opening-up of the protected services sector, for example, could improve access to high-quality services and support the rebalancing toward high-value service jobs (a special focus of the World Bank report). Eliminating remaining restrictions on labor mobility by abolishing the hukou, China’s system of household registration, for all urban areas would equally support the growth of vibrant service economies in China’s largest cities.

Third, the wider use of carbon pricing, for example, through an expansion of the scope and tightening of the emissions trading system rules, as well power sector reforms to encourage the penetration and nationwide trade and dispatch of renewables, would not only generate environmental benefits but also contribute to China’s economic transformation to a more sustainable and innovation-based growth model.

In addition, a more robust corporate and bank resolution framework would contribute to mitigating moral hazards, thereby reducing the trade-offs between monetary policy easing and financial risk management. Addressing distortions in the access to credit — reflected in persistent spreads between private and State borrowers — could support the shift to more innovation-driven, private sector-led growth.

Productivity growth in China during the past four decades of reform and opening-up has been private-sector led. The scope for future productivity gains through the diffusion of modern technologies and practices among smaller private companies remains large. Realizing these gains will require a level playing field with State-owned enterprises.

While the latter have played an instrumental role during the pandemic to stabilize employment, deliver key services and, in some cases, close local government budget gaps, their ability to drive the next phase of growth is questionable given lower profits and productivity growth rates in the past.

In 2022, the authorities will face a significantly more challenging policy environment. They will need to remain vigilant and ready to recalibrate financial and monetary policies to ensure the difficulties in the real estate sector don’t spill over into broader economic distress. Recent policy loosening suggests the policymakers are well aware of these risks.

However, in aiming to keep growth on a steady path close to potential, they will need to be similarly alert to the risk of accumulating ever greater levels of corporate and local government debt. The transition to high-quality growth will require economic rebalancing toward consumption, services, and green investments. If the past is any guide to the future, the reliance on markets and private sector initiative is China’s best bet to achieve the required structural change swiftly and at minimum cost.

First published on China Daily, via World Bank

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The US Economic Uncertainty: Bitcoin Faces a Test of Resilience?

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Is inflation harmful? Is inflation here to stay? And are people really at a loss? These and countless other questions along the same lines dominated the first half of 2021. Many looked for alternative investments in the national bourse, while others adopted unorthodox streams. Yes, I’m talking about bitcoin. The crypto giant hit records after records since the pandemic made us question the fundamentals of our conventional economic policies. And while inflation was never far behind in registering its own mark in history, the volatility in the crypto stream was hard to deny: swiping billions of dollars in mere days in April 2021. The surge came again, however. And it will keep on coming; I have no doubt. But whether it is the end of the pandemic or the early hues of a new shade, the tumultuous relationship between traditional economic metrics and the championed cryptocurrency is about to get more interesting.

The job market is at the most confusing crossroads in recent times. The hiring rate in the US has slowed down in the past two months, with employers adding only 199,000 jobs in December. The numbers reveal that this is the second month of depressing job additions compared to an average of more than 500,000 jobs added each month throughout 2021. More concerning is that economists had predicted an estimated 400,000 jobs additions last month. Nonetheless, according to the US Bureau of Labour Statistics, the unemployment rate has ticked down to 3.9% – the first time since the pre-pandemic level of 3.5% reported in February 2020. Analytically speaking, US employment has returned to pre-pandemic levels, yet businesses are still looking for more employees. The leverage, therefore, lies with the labor: reportedly (on average) every two employees have three positions available.

The ‘Great Resignation,’ a coinage for the new phenomenon, underscores this unique leverage of job selection. Sectors with low-wage positions like retail and hospitality face a labor shortage as people are better-positioned to bargain for higher wages. Thus, while wages are rising, quitting rates are record high simultaneously. According to recent job reports, an estimated 4.5 million workers quit their jobs in November alone. Given that this data got collected before the surge of the Omicron variant, the picture is about to worsen.

While wages are rising, employment is no longer in the dumps. People are quitting but not to invest stimulus cheques. Instead, they are resigning to negotiate better-paying jobs: forcing the businesses to hike prices and fueling inflation. Thus, despite high earnings, the budget for consumption [represented by the Consumer Price Index (CPI)] is rising at a rate of 6.8% (reported in November 2021). Naturally, bitcoin investment is not likely to bloom at levels rivaling the last two years. However, a downfall is imminent if inflation persists.

The US Federal Reserve sweats caution about searing gains in prices and soaring wage figures. And it appears that the fed is weighing its options to wind up its asset purchase program and hike interest rates. In March 2020, the fed started buying $40 billion worth of Mortgage-backed securities and $80 billion worth of government bonds (T-bills). However, a 19% increase in average house prices and a four-decade-high level of inflation is more than they bargained. Thus, the fed officials have been rooting for an expedited normalization of the monetary policy: further bolstered by the job reports indicating falling unemployment and rising wages. In recent months, the fed purview has dramatically shifted from its dovish sentiments: expecting no rate hike till 2023 to taper talks alongside three rate hikes in 2022.

Bitcoin now faces a volatile passage in the forthcoming months. While the disappointing job data and Omicron concerns could nudge the ball in its favor, the chances are that a depressive phase is yet to ensue. According to crypto-analysts, the bitcoin is technically oversold i.e. mostly devoid of impulsive investors and dominated by long-term holders. Since November, the bitcoin has dropped from the record high of $69,000 by almost 40%: moving in the $40,000-$41,000 range. Analysts believe that since bitcoin acts as a proxy for liquidity, any liquidity shortage could push the market into a mass sellout. Mr. Alex Krüger, the founder of Aike Capital, a New York-based asset management firm, stated: “Crypto assets are at the furthest end of the risk curve.” He further added: “[Therefore] since they had benefited from the Fed’s “extraordinarily lax monetary policy,” it should suffice to say that they would [also] suffer as an “unexpectedly tighter” policy shifts money into safer asset classes.” In simpler terms, a loose monetary policy and a deluge of stimulus payments cushioned the meteoric rise in bitcoin valuation as a hedge against inflation. That mechanism would also plummet the market with a sudden hawkish shift.

The situation is dire for most industries. Job participation levels are still low as workers are on the sidelines either because of the Omicron concern or lack of child support. In case of a rate hike, businesses would be forced to push against the wages to accommodate affordability in consumer prices. For bitcoin, the investment would stay dormant. However, any inflationary surprises could bring about an early tightening of the policy: spelling doom for the crypto market. The market now expects the job data to worsen while inflation to rise at 7.1% through December in the US inflation data (to be reported on Wednesday). Any higher than the forecasted figure alongside uncertainty imbued by the new variant could spark a downward spiral in bitcoin – probably pushing the asset below the $25000 mark.

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