Chinese President Xi Jinping's Davos speech about macro-policy coordination
John Gong
Chinese President Xi Jinping address the 2022 World Economic Forum virtual session, in Beijing, capital of China, January 17, 2022. /Xinhua

Chinese President Xi Jinping address the 2022 World Economic Forum virtual session, in Beijing, capital of China, January 17, 2022. /Xinhua

Editor's note: John Gong is a professor at the University of International Business and Economics and a research fellow at the Academy of China Open Economy Studies at UIBE. The article reflects the author's views and not necessarily those of CGTN.

Chinese President Xi Jinping's Davos speech last night reiterated many of the same points regarding multilateralism and globalization that we have heard previously, but one thing new standing out is the point about macro-policy coordination in the post-pandemic world.

President Xi invoked an interesting illustration that countries are not riding separately in some 190 small boats, but are rather all in a giant ship sharing a common future amidst the raging pandemic. But global cooperation should go well not only at the medical level, but also into other important areas, including the economic sphere.

Later in his speech, after mentioning the prospect of inflationary pressures, he said, "If major economies slam on the brakes or take a U-turn in their monetary policies, there would be serious negative spillovers. They would present challenges to global economic and financial stability, and developing countries would bear the brunt of it."

By that, it is very clear that President Xi was referring to the expectation of the Federal Reserve in the U.S. to tighten up monetary policy and raise interest rates. There is some market consensus on Wall Street that the Fed will raise interest rates four times this year, and that will inevitably lead to the strengthening of the U.S. dollar, which will in turn have a profound negative impact on emerging market economies, especially those countries that have a large amount of external debt, such as Turkey and Sri Lanka, in which we have already observed this severe problem.  

U.S. dollar's appreciation will result in a capital exodus in these countries, leading to local currency's depreciation and a shortage of foreign exchange reserve, which is an empirically validated phenomenon historically.

The logo of the World Economic Forum at the Davos Congress Centre, January 20, 2019. /VCG

The logo of the World Economic Forum at the Davos Congress Centre, January 20, 2019. /VCG

It is against that backdrop that later on in the speech, President Xi called for strengthening macro-policy coordination. "Major economies should see the world as one community, think in a more systematic way, increase policy transparency and information sharing, and coordinate the objectives, intensity and pace of fiscal and monetary policies, so as to prevent the world economy from plummeting again. Major developed countries should adopt responsible economic policies, manage policy spillovers, and avoid severe impacts on developing countries," he said.

In all honesty, interest rate hike and dollar's appreciation in the U.S. are not likely to have much of an impact on China's economy. China's foreign trade sector registered a record high in volume last year, dashing the $6 trillion mark with a $676.4 billion trade surplus. That is a lot of money to add on top of the over $3 trillion foreign exchange reserve the country maintains currently. If anything, it is quite likely that Chinese exports will continue to do well this year, and as a result Chinese yuan will continue to keep its already much appreciated level vis-à-vis the U.S. dollar.

But then why would President Xi make a big deal out of the Fed's interest rate hike and call for macro-policy coordination among major economies? The answer lies in China's long-held principle in foreign policy that it would speak for and stand on behalf of developing countries. The late Chinese leader Deng Xiaoping once famously said that China is forever on the side of the developing world.

And this stance will still hold true even when China is increasingly moving into the developed world itself. As the director of the National Bureau of Statistics Ning Jizhe said at a press conference on January 17, China's GDP per capita reached $12,551 last year, which is only 144 bucks away from the World Bank gross national income system's threshold level for high-income countries, at $12,695. I am pretty sure China will be in that group at this time next year.

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