Category Archives: Economy

OECD Sees Trend Decline For China’s Growth Beyond Headwinds

Chart showing OECD forecasts made in June, September and November 2022 for China's GDP growth in 2022-24

THE OECD SEES China’s economy growing by 3.3% this year, a slight uptick from its 3.2% forecast in September. However, it has trimmed its forecast for 2023 to 4.6% from 4.7% in the face of a global economy expected to slow to 2.2% growth next year from 3.1% this.

Globally, tighter monetary policy, higher real interest rates, persistently high energy prices, weak real household income growth and declining confidence are all expected to sap growth, the OECD says in its latest Economic Outlook.

Those headwinds are buffeting China, but the OECD underlines how, additionally, the persistance of the omicron variant has caused recurring waves of lockdowns in 2022, disrupting economic activity.

Growth is being held up by infrastructure investment and efforts to bail out the property sector, including more stringent implementation of credit quotas for presold housing and a lower lending rate for first homebuyers.

Monetary policy has generally become more supportive with a series of interest rate and reserve requirement rate cuts. 

Against that, a rise in precautionary household savings, spurred by low consumer confidence coupled with inadequate social protection, is holding back a rebalancing of demand towards consumption. 

However, despite recent fresh food price rises, the OECD expects headline consumer price inflation to remain benign due to measures to manage energy and food prices: 

  • Replacing part of China’s crude oil imports with discounted Urals oil from Russia is helping to contain inflationary pressure, and LNG reserves are being refilled from Russian sources. 
  • China’s large grain reserves and export restrictions in the form of quotas will continue to mitigate the impact of rising global grain prices on domestic inflation and reduce the risk of shortages. 

Lockdown-induced supply-side constraints on fresh food are the more significant inflationary concern.

The OECD also expects fiscal policy to become more supportive through cuts and deferrals of taxes and charges and spending of reserve funds. It says that a wide range of additional policies is being implemented, including ones outside the public budget. Overall, the measures are worth 1-2% of GDP.

Export growth will also likely stay low amid weaker global growth before picking up in 2024. 

Over that time horizon, the OECD expects GDP growth to gradually move back to its underlying pace, which is slowing. It is forecasting 4.1% growth in 2024. Meanwhile, infrastructure investment will pick up, partly offsetting weaker real estate investment. 

However, the OECD warns:

Continued defaults and disorderly deleveraging in the overstretched property sector may trigger failures of smaller banks and shadow banking institutions. By contrast, relaxing prudential measures and encouraging investment in real estate may fuel the bubble and cause more significant disruptions further down the road.

A further rise in corporate defaults will improve risk pricing but may adversely affect banks, trust companies, and other private and institutional investors. 

The key downside risk remains Covid-19. Vaccination rates have picked up, but they remain low among the elderly, especially those over 80. Booster jabs also seem to have plateaued. Further, the effectiveness of Chinese vaccines is less than that of Western ones. 

That makes lifting the zero-Covid policy nigh impossible in the near term, regardless of its economic cost. The recent outbreaks have foiled attempts to administer it more flexibly.

Like the IMF, the OECD calls for structural reforms to strengthen the social safety net, which would help to reduce precautionary savings and rebalance demand from investment to consumption. It suggests that pension and unemployment insurance coverage should be extended to all and health insurance coverage widened.

It also suggests a series of reforms that would strengthen the private sector and lessen the dominance of state-owned enterprises, although that is not the tenor of the new era.

Leave a comment

Filed under Economy

How Private Chinese Companies Can Signal Party Fealty

CHINA HAS A unique model of corporate governance. It is one in which the ruling party has formal standing not only in state-owned enterprises (SOEs), as is to be expected, but also in privately owned companies.

Formalising and strengthening that standing has been an official policy since 2015. Research by Lauren Yu-Hsin Lin and Curtis Milhaupt from the law schools of the City University of Hong Kong and Stanford University, respectively, that recently crossed this Bystander’s desk shows that the policy has been less rigorously adopted by SOEs than might have been expected.

However, the authors also find that one in 16 stock-market-listed private companies had also taken it up, mainly, they conclude, as a way of signalling their fealty as compliance is not mandatory in the private sector. 

The research covers the period from 2015, when the party-building policy was launched, to 2018. It does not cover the ‘rectification’ campaign against privately owned technology companies to ensure their alignment with national goals, which will likely have spurred more compliance with the policy.

Among SOEs, adoption ranged from token changes to substantive accession of corporate control to the Party, for example, by combining the roles of company chairman and secretary general of the Party unit within the company, with the appointment being made jointly by the Party and the company.

The more politically connected an SOE is, the more compliant with party-building it tends to be. The authors identify a similar effect among private companies, with adoptions of the policy most prevalent among firms with politically-connected directors or chief executive officers.

The study covers all 3,446 A-share listed nonfinancial Chinese companies, which were grouped into three categories:

  • those with more symbolic provisions, such as simply referencing the Party constitution in the firm’s corporate charter; 
  • provisions that allow the Party to appoint, manage or supervise corporate personnel; and 
  • provisions concerning the party’s decision-making powers within the firms.

Nine out of ten private companies that voluntarily amended their charters only adopted symbolic or less material provisions. This implies a broad reluctance to allow party intervention in day-to-day corporate management.

Even among those that did accede in allowing more Party intervention, there was a notably low adoption rate for provisions such as management’s prior consultation with the party committee, the dual appointment of the chairman as also the party secretary, and the appointment of a full-time deputy party secretary.

As with SOEs, these three provisions proved to be the least popular among private companies, the researchers suggest, because they allow the Party to monitor and intervene in daily management. 

That, in turn, suggests that the party’s demand for political conformity on the part of the business sector is constrained not only by agency problems but also by market discipline and corporate law to a greater extent than is commonly assumed. 

Nonetheless, as the authors observe, all Chinese firms, regardless of state or private ownership, must remain in the Party’s good graces to grow and prosper. 

Leave a comment

Filed under Economy

China’s GDP Rebound Does Not Look Long-lived

Chart showing China's quarterly GDP growth year on year from third quarter, 2019 to date

CHINA’S ECONOMY GREW by 3.9% year on year in the third quarter, a rebound from virtually flat growth in the second quarter.

The announcement of the GDP data had been delayed by the National Bureau of Statistics for unexplained reasons from their scheduled release ahead of the 20th Party Congress.

Other high-frequency data released on October 24 shows the rebound weakening in September going into the fourth quarter.

Domestic consumption is still being suppressed by zero-Covid lockdowns, unemployment is edging up and the property sector contracted for the fifth consecutive month. Exports are also slowing as the global economy runs into the headwinds of inflation and recession fears.

Even with another quarter of 3.9% growth, the economy would only expand by 3.2% for the full year. That would meet the IMF’s latest downwardly revised GDP forecast but be well below the now little-mentioned official target of 5.5%.

Markets tumbled on the data, the presentation of the new Politburo Standing Committee, which comprises Xi Jinping loyalists, and a reading of the Party Congress as indicating national security would take primacy over economic development in Xi’s third term. Nor was there any indication of imminent easing of the zero-Covid policy or of more aid for the ailing property sector.

As the UK government found out recently, markets can be punishing of governments, even those who do not have much time for them.

1 Comment

Filed under Economy

IMF Cuts China Growth Forecasts, Frets About Property Crisis

Screenshot of cover page of IMF's World Economic Outlook, October 22

The International Monetary Fund has again cut its growth forecasts for China. Its newly published World Economic Outlook expects the economy to grow by 3.2% this year and 4.4% in 2023. 

These are cuts of one-tenth and two-tenths of a percentage point, respectively, from the forecasts it made in July and 1.2 percentage points and seven-tenths of a percentage point from April’s forecasts. 

GDP growth of 3.2% would be the lowest in more than four decades, excluding the initial Covid-19 crisis in 2020. China’s economy grew by 8.1% in 2021 as it recovered from that.

These latest revisions should be seen in the context of a global economy forecast to grow at 3.2% this year, unchanged from July’s forecast, but slowing to 2.7% in 2023, two-tenths of a percentage point less than forecast in July, and down from 6.0 growth in 2021.

The Fund points to two main drags on China’s growth:

  • continuing weakness in the property sector, where it warns that further deterioration could spill over to the domestic banking sector, which would have adverse effects outside the country; and 
  • the anti-Covid lockdowns, which have imposed sizable constraints domestically and gummed up already strained global supply chains. 

The Fund says that pandemic-related forces have been significant in China, with its second-quarter contraction contributing to slower global activity. 

Temporary lockdowns in Shanghai and elsewhere due to COVID-19 outbreaks have weakened local demand, which is reflected in the new-orders component of the purchasing managers’ index. Other data corroborate this picture of slowing economic activity in China. Manufacturing capacity utilization in the country, for example, slowed to less than 76 percent in the second quarter: its lowest level in five years, except during the acute phase of the pandemic. 

Such disruptions not only slow the domestic economy but are felt more broadly. Lower demand in China implies fewer exports for foreign suppliers. At the same time, capacity constraints in production and logistics delay the unclogging of supply chains, keeping global supply pressures—and hence inflation—elevated. 

Pedalling as softly as it can, the Fund calls on Beijing ‘to pave the way’ for a safe exit from the zero-Covid strategy, including by adding to the country’s successful vaccination campaign, especially for the undervaccinated elderly. 

The Fund recites a litany of downside risks to the global economy, from a Covid resurgence to monetary policy divergence. In that last regard, China is already an outlier, with the People’s Bank of China cutting interest rates when other central banks are raising them.

However, the signs of a significant slowdown in the real estate sector, historically an engine of growth for China’s economy, exercise the IMF, which says that the sector’s downside risks dominate the outlook for China’s growth recovery. 

The decline in real estate sales prevents developers from accessing a much-needed source of liquidity to finish ongoing projects, putting pressure on their cash flows and raising the possibility of further debt defaults. Concerned with the delay in the delivery of residential units, thousands of buyers are calling for a moratorium on mortgage payments that would lead to forbearance and exacerbate the risk of nonperforming loans for banks, as well as the liquidity squeeze developers face. Uncertainty about the property sector could also have an impact on consumption and local government finances.

The Fund fears that further intensification of these negative feedback loops between housing sales and developer stress risks a larger and more protracted contraction.

This would be a large blow, given that the real estate sector makes up about one-fifth of GDP in China. Furthermore, the potential for banking sector losses may induce broader macro-financial spillovers that would weigh heavily on China’s medium-term growth.

1 Comment

Filed under Economy

Strong Dollar Sends Yuan To New Lows, And No One Is Bothered

THE YUAN HAS fallen to a record low against the US dollar since it became internationally convertible in 2011 when Beijing allowed some overseas fund-management and securities firms to invest their yuan onshore.

This point has been coming. The People’s Bank of China has been letting the currency fall, managing only the speed of the descent with its trading band mechanism.

With inflation relatively low by world standards at 2.5% in August, China has the headroom to take the inflationary hit from a depreciating currency that makes imports more expensive. The intention is that the boost the falling yuan will give to exporters will revitalise an economy whose growth has slowed.

However, exports now account for only around 20% of the economy. A cheaper yuan will go only some of the way to offsetting the effects of zero-Covid lockdowns and a deeply troubled property market that is looking more and more like a structural, not cyclical, problem.

Raising interest rates to defend the currency would only worsen the property sector’s malaise. To the contrary, cutting them has been part of Beijing’s stimulus toolkit.

The yuan is far from the only currency to be battered by the US dollar’s strength. The euro, yen and British pound are all reeling from the US Federal Reserve’s aggressive raising of interest rates to bring down US inflation that has proved more persistent than expected.

The Federal Reserve will not abandon that policy soon. So far, US exporters have not been squealing about how the strong dollar is hurting them, as happened in the run-up to the Plaza accord in 1985. That international agreement to the US dollar led to the endaka shock to the economy of Japan, then playing the role China has recently taken as exporter to the world.

We are not at the point of a re-run of that yet. Neither China nor the United States have a short-term incentive to alter their currency’s trajectory. That point will come, but the question is whether it arrives before or after the Fed thinks it has tamed inflation.

However, just recall, a decade ago Beijing was being accused of being a currency manipulator for keeping the yuan low.

Leave a comment

Filed under Economy, Markets, Uncategorized

OECD Sees Recovery Hope For China’s Economy In 2023

Table showing OECD GDP growth forecasts for 2022 and 2023 as updated in September 2022

THE OECD HAS cut its forecast for China’s GDP growth this year by 1.2 percentage points to 3.2%, citing repeated lockdowns under the zero-Covid policy and the crisis in the property market.

Its latest interim Economic Outlook, updating its June numbers, paints a grim picture of the worldwide shock stemming from Russia’s attack on Ukraine. The ensuing energy crunch and surge in food prices have inflicted a widespread cost-of-living crisis. The OECD is holding its global growth forecast unchanged at 3.0% but sees growth slowing next year by 0.6 of a percentage point to 2.2% as inflation becomes entrenched.

In contrast, the OECD sees a recovery in China next year to 4.7% growth on the back of policy stimulus and a rebound from this year’s Covid lockdowns. It does not see much, if any, further monetary easing, but it expects stimulus measures worth up to 2% of GDP to strengthen infrastructure investment. However, even 4.7% growth would still be 0.2 of a percentage point lower than the OECD’s previous forecast.

It also expects China’s headline inflation next year to be around 3%, a higher level than in the recent past. China has had relatively low and stable inflation by world standards, despite the upward pressures from food and energy.

The OECD’s recovery growth forecast for 2023 turns on Beijing dealing with the continuing real estate downturn amidst elevated corporate debt levels. It also warns that risks remain of sustained weaker private domestic demand, a veiled reference to the continuance of strict zero-Covid protocols.

As a measure of how the world has been changed by Russia’s invasion of Ukraine, it is worth remembering that a year ago, the OECD was expecting China’s economy to grow by 5.8% this year.

Leave a comment

Filed under Economy

China’s Export Growth Deceleration Points To More Support For Yuan

AUGUST’S SLOWER THAN expected growth in China’s exports is another sign that the economy’s recovery is losing what little traction it had.

More policy support is likely as a consequence.

Exports grew by 7.1% last month year-on-year in US dollar terms, according to the General Administration of Customs, the slowest since April and almost half the expectation of private economists.

As much as half the growth was accounted for by higher prices, on some estimates, implying the growth in the volume of exports was even weaker than the headline number.

Imports grew 0.3% in value, down from an increase of 2.3% in July, also well below expectations.

Domestic factory output in August also contracted for a second consecutive month due to power cuts and lockdowns in response to worsening Covid outbreaks.

At the same time, weakening global demand is lessening the demand for China’s exports in most of its major markets, except Russia (up 26.5% in August, year on year).

Weaker exports will weigh on the yuan, which is close to breaching seven to the dollar, despite intervention by the People’s Bank of China.

A depreciating currency would be a boon to struggling exporters but not to domestic consumer businesses such as food and retail companies that have to bear the cost of rising commodity imports.

President Xi Jinping will be well aware of the impact on Chinese citizens as he prepares for an unprecedented third term. That implies further currency intervention as well as other measures to stimulate the economy.

Leave a comment

Filed under Economy, Trade

More Signs Point To China’s Continuing Muted Economic Growth

CHINA’S LATEST OFFICIAL manufacturing purchasing managers index (PMI) points to extremely muted third-quarter GDP growth.

That is not the economic background President Xi Jinping would have chosen to go into the Party Congress, which state media now say will start on October 16, and during which Xi is likely to be reappointed to an unprecedented third term as Party general secretary.

August’s manufacturing PMIs was 49.4, up a tad from 49.0 in July but still stuck in contraction territory (50 is the PMI’s divide between contraction and expansion). The sub-indicators of output and export orders continued to contract. The non-manufacturing PMI is still in expansionary territory but nevertheless eased to 52.6 from 53.8.

State media’s boosterism about the latest data showing recovery seems misplaced.

COVID-19 lockdowns and the extreme heat and drought continue to disrupt the domestic economy. At the same time, soft external demand, as Europe and the United States battle inflation and the threat of recession, adds to the headwinds buffeting China’s economy.

Leave a comment

Filed under Economy

US Businesses In China Face Testing Times

THE LATEST ANNUAL SURVEY survey of its members by the US-China Business Council shows less optimism among US companies operating in China about the business outlook for the country than at any time since the Council started asking. 

Barely half of the 117 firms surveyed expressed optimism about the business outlook for the next five years, a record low. One in five said they were pessimistic.

Two points to note: the respondents to the Council’s survey tended to be their members that are large, US multinationals that have operated in China for more than 20 years and thus are committed to the China market for the long-term and have an understanding of its vagaries — ‘in China, for China’ in the argot.

Second, the survey was fielded before the visit of US House Speaker Nancy Pelosi to Taiwan, which prompted a sufficiently belligerent reaction from Beijing that many US-based chief executives started reviewing their China strategies. The timing may explain why zero-Covid pipped US-China tensions as companies’ top concerns. The survey’s key takeaways:

• China’s COVID-19 policies are the top challenge: China’s COVID-19 strategy now poses the top challenge to US companies, displacing US-China relations, which ranked as the top concern for four consecutive years. The looming possibility that companies will again be forced to partially halt operations due to lockdowns and the impacts of local controls on consumer demand have undermined confidence in the business environment.

• Bilateral tensions continue to hurt American companies: Respondents report record-high concern with US-China relations, which continue to deteriorate. Geopolitical pressures are bleeding into the commercial realm, leaving companies—which depend on a stable and predictable trade environment—in increasingly challenging positions. Chinese customers’ real and perceived concerns about ongoing access to US technology due to US-China tensions continue to threaten US companies’ competitiveness in the market, an alarming trend that could be difficult to reverse.

• Little progress on long-standing issues as new barriers emerge: Significant market access barriers remain, even as China assures foreign companies that they will receive equal treatment. Intellectual property (IP) protection has seen limited improvement. Chinese economic planners have expanded industrial policies to bolster Chinese companies, and localization requirements to qualify for state-affiliated procurement are increasing. At the same time, new Chinese data security and privacy rules threaten to disproportionately increase costs for multinational companies.

• Trajectory of commercial relations at another inflection point: The difficult operating and geopolitical environment has impacted company performance, leading to record levels of pessimism and affecting companies’ decisions about their supply chains and future investments. At the same time, companies overwhelmingly remain profitable in China and they continue to recognize China’s importance to their global competitiveness. Whether business sentiment and the pace of future investment rebound or continue to falter will depend on decisions by US and Chinese policymakers in the coming months and years.

Zero-Covid policies, regulatory crackdowns to align business with national goals and tensions with the United States will likely continue for the foreseeable future and have a long-term impact on foreign companies operating in China. 

Perhaps most damagingly for firms’ confidence is that they underline the secondary position to the state to which business is relegated. For a handful of companies, that will lead to exiting the market in whole or part, as companies that source products or raw materials, rather than sell into the Chinese market, are starting to do. 

However, for those unwilling to give up on the markets offered by the world’s second-largest economy, large enough to segregate their global supply chains, and with the means and will to do so, it will probably mean hunkering down for several uncomfortable and testing years.

Leave a comment

Filed under China-U.S., Economy

Rate Cut Only Highlights Slowing Economic Growth In China

THE 10 BASIS points cut by the People’s Bank of China to its one-year lending rate for the first time since January to 2.75% was unexpected. 

It was a direct response to July’s economic data showing the economy slowing further.

Retail sales growth in July slowed to 2.7% year-on-year, down from 3.1% in June. Industrial output growth was little changed from June at 3.9% year-on-year. Fixed asset investment growth, at 5.7% year-on-year in January-July, was nearly half the pace of last year, and private sector investment grew by just 2.7% year-on-year in the same seven-month period.

The downturn in the beleaguered housing market is accelerating. Property investment fell by 12.3% year-on-year in July, the fastest pace this year. New home sales fell by 28.3% year-on-year. 

Most concerning for the leadership is that, while urban unemployment overall was steady in July at 5.4%, unemployment among 16-24-year-olds set another monthly record at 19.9%. 

The early indications from August are that the economy is not turning round. If anything, the downside risks are growing with the latest lockdowns to control new Covid-19 outbreaks and weaker export prospects as global markets slow.

Further monetary and fiscal stimulus to rev up domestic demand, including state money to revive property development projects, are likely as today’s cut in rates is too modest to have more than a marginal impact. 

1 Comment

Filed under Banking, Economy