An unintended consequence of the virus has been ‘one of the wildest bull markets in recent economic history’ but a worsening of income distribution will have a negative impact further down the line.

Covid-19 will be remembered as the worst global economic shock in recent history but, compared to the most similar one, the Great Depression of 1929, its consequences on asset prices have been radically different.
In fact, the Great Depression started with an implosion of equity prices while the current pandemic started with a sharp correction in asset prices, especially as Covid reached Europe and the US in March last year, but quickly developed into one of the wildest bull markets in recent economic history.
The reason for the diametrically different equity performance mainly lies on a very

This opinion piece was originally published in Nikkei Asia.

After more than seven years of negotiations, the European Union and China appear to have reached a deal for their Comprehensive Agreement on Investment to go forward right before the deadline pressed by President Xi Jinping at the EU-China summit back in September.
The deal is important politically as it shows the EU’s commitment to its own economic sovereignty without constraints from the U.S. and it follows the example set by the 10-members of the Association of Southeast Asian Nations, Australia, Japan and South Korea in signing the Regional Comprehensive Economic Partnership back in November. Suddenly, it looks as if U.S. President-elect Joe Biden has been left alone in his pursuit to contain China even before he is sworn

A look into the potential Comprehensive Agreement on Investment between China and the European Union.
After more than seven years of negotiations, a final agreement between China and the European Union on a Comprehensive Agreement on Investment (CAI) could be reached before the end of 2020. This deadline was agreed at the EU-China Summit in April 2019 and President Xi reminded European of the importance of striking a deal before year-end during the EU-China Virtual Summit in September.
Here, we first examine the minimum conditions that EU negotiators would want met in order to seal a deal. Second, we discuss why the timing of the deal with a year-end deadline is not favourable from the EU’s perspective.
Minimum conditions
Four considerations are of crucial importance for the CAI to make

An ageing population is generally bad news for growth prospects, but Japan and Taiwan offer important lessons.

This opinion piece was originally published in Asia Times.

Many Asian economies will age more rapidly over the next several decades, including Hong Kong, Japan, mainland China, Singapore, South Korea, Taiwan and Thailand. Asia’s working-age population peaked in 2015 and will gradually decline at an accelerating rate in the coming decades.
By 2050, the elderly population in these countries on average is expected to increase to 27% from 7% in 1995.
Reduced labour supply creates a drag on growth, but this can be mitigated by higher labour participation, investment in capital-intensive sectors, and government policies that address productivity.
That said, it is a gravity-defying

China is no doubt bound to benefit, but other members of the regional trade pact may benefit even more

This opinion post was originally published in Asia Times.

There could not be better timing for China to announce such a huge trade deal as the Regional Comprehensive Economic Partnership (RCEP), in the midst of presidential reshuffling in the US.
Furthermore, among the many wild cards that Beijing could use during the period of political vacuum in the US, opting for trade liberalisation is a great plus for China’s image and probably more relevant in economic terms than any other more aggressive option that the media have been discussing, from Taiwan to the South China Sea.
Still, it is important to note that the RCEP negotiations had been dragging on for eight years and that the final

Testimony before the European Parliament on the subject of China-EU economic relations.

On November 9th, 2020 Bruegel senior fellow Alicia García-Herrero presented her testimony before the Committee for International Trade (INTA) of the European Parliament. At the public hearing entitled ‘EU-China Trade and Investment Relations in a post-covid world’, she presented her input on EU-China economic relations.

‘The Communist Party has acknowledged that the outside world now is more of a risk than an opportunity.’

This opinion post was originally published in Asia Times.

Right before what was expected to be chaotic presidential election in the US, the 19th Central Committee of the Communist Party of China calmly, but surely, last week laid out its targets for the 14th Five-Year Plan and beyond at its Fifth Plenum, and, most important, how to achieve them.
This kind of engineering of goals and instruments, highly criticised after the collapse of the Soviet Union, is now much more fashionable thanks to the China miracle, namely the massive reduction in poverty and the doubling of income in just 10 years.
To understand the nature of the goals and instruments announced at the Fifth Plenum, nothing

For all Beijing’s ambitions of cracking the hegemony of the US dollar in the face of Trump administration sanctions, the yuan still has a long way to go.

The opinion post was originally published in Nikkei Asia Review.

The yuan is higher than it has been in more than two years, and foreigners are suddenly showing interest again in holding the Chinese currency.
Earlier in the decade, Beijing brought the yuan into the spotlight through an aggressive effort to take the currency overseas through swap agreements with foreign central banks and offshore bond issuances denominated in the currency.
This time, foreigners are coming to China to get yuan. Chinese assets stand out at a time interest rates in much of the world are at zero or below and many currencies are sagging. Beijing has

It is time to rethink many of the basic principles of our economic model to mitigate the impacts of the COVID-19 pandemic.
Those who say there are no letters left in the alphabet to describe the evolution of the world economy after the pandemic are absolutely right. It is abundantly clear now that we cannot expect to see a rapid V-shaped recovery — nor should we expect a complete stagnation or a L-shaped recovery.
The square root-shaped economy
The newest version of recovery, the K-shape, reflects the increasing disparity between the winning and losing sectors, including the middle class.
So rather than suggest a letter, I would like to call for a different shape recovery in a post-COVID world: the square root. A square root begins with a strong upswing, much like the one we are

This opinion piece was originally published in Nikkei’s Asian Review. Minds in Beijing are focusing increasingly on the upcoming meeting of the Chinese Communist Party Central Committee next month. High on the body’s agenda will be sketching out a new official five-year plan for Asia’s largest economy. A freshly coined buzzword looks set to play […]

This opinion piece was originally published in Nikkei’s Asian Review.

Minds in Beijing are focusing increasingly on the upcoming meeting of the Chinese Communist Party Central Committee next month.
High on the body’s agenda will be sketching out a new official five-year plan for Asia’s largest economy. A freshly coined buzzword looks set to play a leading role in these discussions: “dual circulation.”
The new term has won a featured place in

The Hong Kong government might want to consider diversifying its economy by using part of the savings earmarked for rainy days. Beyond cushioning the negative impact of Covid-19 on SMEs and households, it is one more reason to spend.

This article originally appeared in the South China Morning Post.

Hong Kong’s GDP declined by 9 per cent in the second quarter, but this figure should be read in the context of a worldwide collapse in GDP growth during the Covid-19 pandemic. Singapore’s economy, probably the most similar to Hong Kong in terms of structure, experienced a much bigger decline during the same period.
Both economies are similarly open, which means the restrictions in international mobility stemming from measures taken to control the pandemic have halted the economy. In addition,

This article was originally published in the Observer Research Foundation. As Brazil, Russia, India and Mexico record the fast spread of the Covid-19 contagion, a third wave of the pandemic is reaching the emerging world. As a result, business sentiment has decreased in March and April in the region. What’s more, as emerging economies gradually […]

As Brazil, Russia, India and Mexico record the fast spread of the Covid-19 contagion, a third wave of the pandemic is reaching the emerging world. As a result, business sentiment has decreased in March and April in the region. What’s more, as emerging economies gradually moved towards tighter mobility restrictions, the lack of mobility is set to weigh on the economic outlook. In fact, the International Monetary Fund (IMF) is expecting the

The announcement of a large stimulus without a growth target indicates that China’s recovery is far from complete.
It was hard to think of a more important gathering than last week’s ‘Two Sessions’, during which Chinese political leaders were to guide all of us as to the way ahead for the Chinese economy. While this yearly event is always important, this year’s was crucial. 2020 marks the end of two key cycles of economic planning: the current Five-Year Plan, and the end of the 10-year period during which the country aimed at doubling its income, which is the operational target to measure President’s Xi Great Rejuvenation plan. Expectations were running all the higher that the Chinese economy is reeling from unprecedented levels of uncertainties due to coronavirus epidemic – including

La tercera oleada de la pandemia llega al mundo emergente. ¿Qué esperar a corto y medio plazo?Al ‘shock’ económico inmediato podría seguirle una remodelación en la cadena de valor global.

El Covid-19 hizo estragos en la economía china durante el primer trimestre de 2020 y hace lo propio ahora  mismo en Europa y Estados Unidos. Con la primera oleada de la epidemia, mientras se expandía el brote de coronavirus, el PIB de China experimentó una contracción del 6,8%. La enfermedad provocó la desaparición de la demanda interna, golpeando en especial las ventas minoristas locales, y un rápido deterioro del mercado de trabajo, con una subida de la tasa de desempleo y el hundimiento de los ingresos disponibles. Al reanudarse la producción en China, una de las consecuencias del hundimiento de la

This opinion piece was originally published in Asia Times and Medium China’s GDP in the first quarter of the year has surprised nobody but the devil is in the details. Local retail sales continued to fall in March (-16%), marginally better than during the peak of the Covid19 outbreak in January and February. The continuation […]

China’s GDP in the first quarter of the year has surprised nobody but the devil is in the details. Local retail sales continued to fall in March (-16%), marginally better than during the peak of the Covid19 outbreak in January and February. The continuation of the slump in domestic demand clearly stands out when compared with the return to production in March.  In fact, industrial production hardly declined in March (1.1%) after a collapse in January-February.

Yesterday’s G7 video-conference ended in silence. It wasn’t even possible for the group to issue a joint statement after the US administration’s push to enter into a blame game over the Covid-19 label. However, let’s not give up. There is one more chance today for global coordination: the G20 emergency video-conference hosted by Saudi Arabia. This is the opportunity for the G20 to stand out and overshadow the G7 and for the world to end up with some international policy coordination. The key issues continue to be dollar liquidity, excessive dollar appreciation and plummeting oil prices.
What a difficult world to live in, especially for those who believe in international cooperation. In the light of a pandemic, each nation affected takes its own measures without bothering to look at its

Given how badly the coronavirus outbreak in the US is affecting Trump’s chances to be reelected, let’s hope he comes to its senses and see the advantages of leading a coordinated effort to save the global economy. For once since he came to power, he may see the positive angle of global cooperation and multilateralism, of course, for his own sake.
Since the coronavirus outbreak has become a pandemic, global risk aversion has spiked driving the king safe asset, US Treasuries to their lowest yield on record while equity markets have tanked globally and high yield credit spreads have widened, reminding us all of the global financial crisis only twelve  years ago. The difference is that this time around the shock has not been created by financial imbalances in a particular country, the US, but

After more than a month of horrible news on the Covid-19 coronavirus outbreak, first in China and then globally, the markets have finally abdicated.For the whole of February, markets had managed to endure the first ups and downs, especially outside China. To begin with, the area of ​​contagion was expected to remain limited to China or, at best, to the rest of Asia. In addition, once it was understood that the impact on the Chinese economy was going to be very negative, the markets came up with the hope of a great stimulus plan to be carried out by Beijing, which filled them with bliss, to the point of recovering all of the losses that had accumulated since the epidemic began in Wuhan.For too long, investors continued to turn a deaf ear to the announcements by a large number of companies

The stimulus is regressive in nature, as the bulk of expenditure is a one-off cash disbursement per adultAfter enjoying 15 years of fiscal surplus, Hong Kong is now running a deficit due to plummeting growth. The economy contracted by 1.2% in 2019, and this year will most likely be the same, if not worse.Last week’s budget shows that Hong Kong’s sweet dilemma has come to an end. It is a test for whether Hong Kong really has adopted a “new fiscal philosophy,” as mentioned by Chief Executive Carrie Lam back in 2018, on bolder spending, if necessary.The answer seems to be yes. The headline relief measures amount to HK$120 billion (US$15.4 billion, 4.2% of gross domestic product), with HK$71 billion (2.5% of GDP) handed out as cash. As such, the fiscal deficit may reach 4.8% of GDP on the

Virus shows Southeast Asian factories too dependent on imported production inputsMore abrupt and unexpected than the U.S.-China trade war, the Wuhan coronavirus outbreak has become a wake-up call for international companies about the risks of excessive dependence on China.It is already proving a far bigger shock than the 2003 severe acute respiratory syndrome, or SARS, outbreak. This is because China’s economy is now more than eight times larger than it was then and its importance to the global economy has grown even faster.The country has become a large and vital market for international companies ranging from Apple to Adidas. But with millions of Chinese people confined to their homes and most malls and stores shut, domestic demand has collapsed for the majority of goods and

The response of the global financial markets to the trade agreement reached between the United States and China has been very positive, probably excessively so given the relatively limited size of the agreement reached.The positive thing about the agreement is that it allows a truce — at least partially — in the strategic competition between China and the United States. This truce comes at a key moment for both President Donald Trump and President Xi Jinping for different reasons. China cutting tariffs in half on U.S. goods will serve President Trump as he aims to show that he has managed to take China on before the U.S. presidential election.China Gains Sentiment but Little ElsePresident Xi desperately needed to improve investors’ confidence in China’s economy to pave the way to generate

Much has been written on the Wuhan coronavirus that causes the respiratory disease Covid-19, but very little is known yet about its impact on the global economy and, in particular, the global value chain. Still, one thing is clear: The shock is bigger than that caused by severe acute respiratory syndrome (SARS), for the simple reason that China is much more important for the global economy than it was then.Beyond China’s much larger economic size, it is important to note that China is now much more integrated in the global value chain. By moving up the ladder, China has become a much more important player in exporting intermediate goods than before, which means that any disruption in its production capacity could affect the rest of the world more severely than in the past.It is worth

Much has been written on the Wuhan coronavirus that causes the respiratory disease Covid-19, but very little is known yet about its impact on the global economy and, in particular, the global value chain. Still, one thing is clear: The shock is bigger than that caused by severe acute respiratory syndrome (SARS), for the simple reason that China is much more important for the global economy than it was then.Beyond China’s much larger economic size, it is important to note that China is now much more integrated in the global value chain. By moving up the ladder, China has become a much more important player in exporting intermediate goods than before, which means that any disruption in its production capacity could affect the rest of the world more severely than in the past.It is worth

The coronavirus outbreak will not lead to recession but the costs of ensuring growth targets will be highThe outbreak of coronavirus has struck yet another blow to the Chinese economy after the improvement in business confidence since the Phase One trade deal was announced in mid-December. How severe the coronavirus may be for the Chinese economy will not only depend on the extent and depth of the virus outbreak but also on the government response. The People’s Bank of China immediate and bold reaction to calm markets with the equivalent of USD 170 billion in liquidity injection says it all about the pressure for Chinese policymakers to mitigate the impact of the coronavirus outbreak on financial markets, on sentiment and on the Chinese economy, more generally.Many take the example of the

External PublicationThis article shows some evidence of the decrease in merchandise, capital and, to a lesser extent people to people flows. By: Alicia García-Herrero Date: February 3, 2020 Topic: Global Economics & Governance After decades of increasing globalization both in trade, capital flows but even people to people movements, it seems the trend has turned towards deglobalization. This article shows some evidence of the decrease in merchandise, capital and, to a lesser extent people to people flows. In addition, zooming into trade, the article offers an account of the importance of the strategic competition between the US and China to foster the deglobalization trend further. This is true for trade but even beyond in the tech and finance space. Finally, the demise of the

The agreement between the US and China should not be read so positively in Europe, especially in GermanyThe reading of the global financial markets on the agreement reached between the United States and China has been positive, probably excessively, given the relatively limited size of the agreement reached. The best thing about the agreement is that it allows a truce – at least partial – in the strategic competition between China and the United States. This truce comes at a key moment for both presidents, Trump and Xi, for different reasons. Trump needs a victory while calming the financial markets before the US presidential election. Xi needs to improve investors’ perception of China’s economic situation to achieve growth of at least 5.7% in 2020 and, thanks to that, achieve its

It is difficult to imagine how Japan can undertake any major economic reform if it has taken five years to increase the consumption tax and has needed two strong fiscal packages.Since Prime Minister Shinzo Abe came to power in 2012, Japan’s economic recovery has been hinging on his three key economic policies (the so-called three “arrows” of Abenomics) bearing fruit. The first, and best known, arrow is monetary policy, which has been used massively through quantitative easing as well as the introduction of negative rates, but to no avail. In fact, the Bank of Japan’s ultimate objective – pushing up inflation toward a 2% target – is far from being reached.On the second “arrow,” namely fiscal consolidation for a country with one of the highest levels of public debt in the world, the

The U.S. and China’s negotiations on a phase-one deal seem to have stalled again. The market was already aware of the limited nature of the likely deal, but was still hoping for it. Against this backdrop, the investors have reacted negatively to the increased likelihood of not reaching a deal on December 15. If this is the case, the U.S. will apply additional tariffs on Chinese imports. The obvious question to address, thus, is, what can happen to China under such a scenario?We first need to realize that the so-called interim deal would still have left all the tough aspects, i.e. intellectual property protection, industrial policy subsidies, the role of SOEs, market access, etc., to a later stage. Given that the market has already lowered its expectations, a no-deal scenario might not be

Approaching the end of a volatile year, Hong Kong continues to face the triple whammy of slower growth in mainland China, the trade war uncertainty and social unrest.Approaching the end of a volatile year, Hong Kong continues to face the triple whammy of slower growth in mainland China, the trade war uncertainty and social unrest.While the former two external risks are not in the hands of Hong Kong and are subject to global development, the escalated social unrest and the lack of fiscal stimulus are bringing a higher downside risk to economic growth (Chart 1).Housing Is a Critical IssueFrom the priorities chosen, the Hong Kong government concluded that housing and land support are the most urgent issues to be tackled in the short run. However, there is still a lack of creativity and

The economy is in worse shape than in 2015 and policies to boost growth are not as effective as they once wereTuesday’s rally in the renminbi was triggered by positive noises coming from the White House, raising hopes that the US may open the door to a trade deal with China, perhaps within weeks. The market moves saw the Chinese currency at one point strengthening past the seven-per-dollar mark.But investor optimism should be tempered. The world’s second-biggest economy remains in a tight spot. Compared with its previous slowdown in 2015, the Chinese economy is in worse shape today. The policies implemented to boost growth are proving less effective.If a trade deal does not happen, investors should be alert to another competitive depreciation of the renminbi — and a negative reaction in