Category Archives: Economy

IMF Sees Increases In China’s Growth And Debt

THE INTERNATIONAL MONETARY Fund (IMF) has upgraded both its economic growth forecast for China in 2018 and the downside risks of debt.

In its July update to its World Economic Outlook, the Fund says its projections reflect the strong first quarter growth this year and expectations of continued fiscal support.

It now says it expects growth next year to be 6.7%, the same as this year and in 2016, and 0.1 percentage point higher than previously forecast. Growth in 2018 is expected to slow by 0.2 percentage points less than previously projected, to 6.4%.

This the Fund believes will be because authorities will sustain high public investment to achieve the target of doubling in real terms 2010’s GDP by 2020. This, in turn, implies that debt levels will not be attacked as actively as needed and financial reforms delayed.

The National Financial Work Conference, the high level policymaking agency chaired by President Xi Jinping that concluded its quinquennial meeting on July 15, emphasized that policymakers’ priority was to deleverage state-owned enterprises (SOEs) within its focus on limiting systemic financial risk.

First, though, Xi has to get through the forthcoming Party plenum, which should provide clues to the strength of his position to tackle the politically powerful interests that control the SOEs.

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China’s Growth Spurt Provides Scope To Tackle Debt

TALK OF A hard landing for the economy seems distant, now. China’s economy grew by 6.9% in the second quarter year-on-year, the same as in the first quarter and well ahead of the official target of 6.5%, the National Statistics Bureau reports.

Quater-to-quarter growth quickened to 1.7% from 1.3%. Industrial output (up 7.6% in the first half) and consumption (retail sales were up 11% in June year-on-year) picked up while investment remained strong, suggesting that measures to control the frothy housing market have not yet worked through, or perhaps are not working as effectively as policymakers intended. Property investment increased by 8.5% year-on-year in the first half.

The extent to which property prices cool over the rest of the year will be closely watched. If they do, despite the solid underpinnings of the recovery, the growth rate may moderate in the second half, though not to the extent the official target will be threatened.

The long-term build-up of structural imbalances, manifest in the growing levels of debt, remains, but the latest growth figures give the leadership some scope for pushing through financial reforms at the party plenum later this year.

Some of those, notably the expansion of bond markets to allow direct financing of local governments and enterprises in place of policy lending by banks, will have been thrashed out at the two-day National Financial Work Conference that ended at the weekend.

That this quinquennial meeting chaired by President Xi Jinping was convened a year late this time indicates how politically contentious economic reform remains, not least because they also intend to rein in the debt of state owned enterprises, themselves powerful political fiefdoms.

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China Invests Abroad

CHINA IS NOW the second largest investing economy. This reflects Beijing’s ‘Go Global’ policy that delivered a surge of cross-border M&A purchases in manufacturing and services by Chinese firms last year while individuals stepped up their purchases of real estate in developed countries. Chinese firms accounted for 8% of inbound cross-border M&A in the United States last year, worth a record $29 billion.

But China is also the world’s third favourite destination for foreign direct investment (FDI) after the United States and the United Kingdom. According to the UN Conference on Trade and Development (Unctad)’s newly released World Investment Report, 2017, China had FDI inflows of $134 billion last year. That was 1% down on the previous year, mostly because of lower inflows into the financial sector.

However, Unctad notes that:

In non-financial sectors, [China] recorded 27,900 new foreign-invested enterprises (FIEs) in 2016, including 840 with investments above $100 million. In addition, 450 existing FIEs significantly expanded their businesses, undertaking additional investment above $100 million. Non-financial services continued to underpin new FDI, with inflows in the sector growing by 8% while foreign investment into manufacturing continued to shift to higher value added production. In March 2017, for example, Boeing started to build an assembly facility in China, the first such project outside the United States.

Inflows via Hong Kong fell much more sharply, from $174 billion to $108 billion over the same period, though 2015 was an exceptional year and 2016 represented something of a return to trend.

China’s outflows increased to $183 billion in last year from $128 billion in 2015. Those via Hong Kong slowed slightly, from $72 billion to $68 billion.

The Unctad report identifies state-owned multinationals as major players in global FDI. China is home to the most — 257 or 18% of the total, way ahead of second-ranked Malaysia (5%). In 2016, the report notes, greenfield investments announced by state-owned multinationals accounted for 11% of the global total, up from 8% in 2010.

The investments of China’s state-owned multinationals “are instrumental in the country’s outward FDI expansion strategy”, Unctad says. It notes that generally the investments of state-owned multinationals tend to be weighted more heavily in financial services and natural resources than those of multinationals as a whole.

Seven of the 10 largest financial state-owned multinationals are headquartered in China, as are four of the 25 largest non-financial ones — China National Offshore Oil Corp. (CNOOC), China COSCO Shipping Corp., China MinMetals Corp. and China State Construction Engineering Corp. (CSCSC).

China remained the largest investor economy in the least developed economies, far ahead of France and the United States, and showed more interest than most in investing in transition economies, and particularly landlocked ones like Kazakhstan and Ethiopia, though the sums remain relatively small. However, state-owned oil firm Sinopec acquired the local assets of Russian oil company Lukoil for $1.1 billion.

A future focus of China’s investment will be via its One Belt One Road (OBOR) initiative. Beijing has already signed around 50 OBOR-related agreements with other nations, covering six international economic corridors. FDI to Pakistan, for example, rose by 56% year-on-year last year, pulled by China’s rising investment in infrastructure related to the China-Pakistan Economic Corridor, one of the most advanced OBOR initiatives.

Unctad notes:

Stretching from China to Europe, One Belt One Road is by no means a homogenous investment destination. However, investment dynamism has built up rapidly over the past two years, as more and more financial resources are mobilized, including FDI.

A number of countries located along the major economic corridors have started to attract a significant amount of FDI flows from China as a result of their active participation in the initiative.

Central Asia, unsurprisingly, is at the leading edge of this. The implementation of OBOR is generating more FDI from China in industries other than natural resources and diversifying the economies of various host countries.

Chinese companies already own a large part of the FDI stock in extractive industries in countries such as Kazakhstan and Turkmenistan. The ongoing planning of new Chinese investments in the region, however, has focused on building infrastructure facilities and enhancing industrial capacities. In addition, agriculture and related businesses are targeted. For example, Chinese companies are in negotiation with local partners to invest $1.9 billion in Kazakh agriculture, including one project that would relocate tomato processing plants from China.

South Asia benefits from the development of the China-Pakistan Economic Corridor.

This has resulted in a large amount of foreign investment in infrastructure industries, especially electricity generation and transport. For instance, Power Construction Corporation (China) and Al-Mirqab Capital (Qatar) have started to jointly invest in a power plant at Port Qasim, the second largest port in Pakistan. In addition, the State Power Investment Corporation (China) and the local Hub Power Company have initiated the construction of a $2 billion coal-fired plant.

OBOR also stretches to North Africa. Indeed, it seems decreasingly to recognise any geographic limits to its ambition and scope.

Egypt has signed a memorandum of understanding with China, which includes $15 billion in Chinese investment, related to Egypt’s involvement in the initiative. It is undertaking a number of cooperative projects under the One Belt One Road framework, including the establishment of an economic area in the Suez Canal Zone and investments in maritime and land transport facilities.

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OECD Sees China’s Economy Stabilising But Reform Still Needed

THE OECD QUIETLY prides itself on being the grown-up economic forecaster, eschewing the flash and razzmatazz of the International Monetary Fund or the World Bank for an understated mix of solid economic analysis and policy prescription.

The chapter on China in its latest Economic Outlook fits the bill to a tee: a sparse summary of an economy that is stabilising thanks to earlier policy support, but still needing structural reform if ‘rebalancing’ is to be advanced.

GDP growth for this year is forecast to be one-tenth of a percentage point above the official target of 6.5% and the same below in 2018 — ‘holding up’ despite considerable excess capacity remaining in the industrial sector. Consumption remains robust supported by housing-related purchases, e-commerce and overseas tourism.

While infrastructure investment is being sustained, monetary policy is tightening in response to the risk of financial instability, particularly via the shadow banking sector, and other risks that are mounting. Fiscal policy remains expansionary, however. The headline fiscal deficit will be held at 3% of GDP this year and next, the OECD reckons, but policy lending to prop up growth will also slow the rate of rebalancing.

That will also be slowed by the lack of reform, for example to the social safety net, that is diverting monies that individuals could spend on domestic consumption to precautionary savings. Longer term, the OECD says, corporate deleveraging and working off excess capacity “will be crucial to avoid a sharp slowdown in the future.”

It also quietly but firmly makes the point that longer the debt problem is left unaddressed, the larger it will get, and, by implication, the harder it will be to deal with it.

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Politics, Not Debt Will Drive The Deleveraging Of China’s SOEs

MOODY’S CREDIT DOWNGRADE of China caught the attention of the public prints, ever ready, in some quarters at least, to see the prophesied hard landing just around the corner, with the economy crumpling under the weight of an oncoming rush of bad debt. S&P did much the same as Moody’s back in March with much less general notice. In its commentary, Moody’s falls over itself to emphasise the long-term nature of the risk.

As this Bystander has argued before, while China’s debt-to-GDP ratio is large, and has grown in recent years, it remains manageable by Beijing, even in the event of a crisis, and the risk of external contagion is small.

That is not to say it is not of concern to policymakers. It is. It is concentrated in state-owned enterprises (SOEs) and local authorities. SOE debt, at 115% of GDP is concerning. (In Japan and South Korea state-owned corporate debt is about 30% of GDP). And the finance ministry has noted that some local authorities, caught between paying for shutting down loss-making state industries or subsidising them to keep them going, and no longer able to rely on land sales to square their books, are struggling to cover operating expenses.

All this is also a sign, widely commented on by the likes of the IMF, World Bank and the OECD, that the old-school means of state-led infrastructure investment to keep growth going are persisting to the detriment of ‘rebalancing’.  Those two points come together politically.

The political event of the year is, self-evidently, the Party plenum to be held later this year. This is no ordinary plenum, as it is the scene-setter for the next generation of leadership. President Xi Jinping’s legacy is at stake.

Vested interests lying in the way of economic reform have not been fully removed by the anti-corruption campaign. Many of those same interests would also end up on the wrong side of any aggressive debt resolution, given both the individual companies that would be involved and the structural reforms necessary to governance and financial markets.

So, for now, authorities are biding their time over the debt question. The economy has stabilised sufficiently to buy them a few more months of inaction; candidate Trump’s threatened trade war has been headed off; the razzmatazz around One Belt, One Road sustains hopes of new export markets for excess capacity.

Once Xi has consolidated his political control at the plenum, then the debt busters will start to move in.

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Even A Small Belt And Road Would Be Huge

Chinese President Xi Jinping delivers a keynote speech at the Belt and Road Forum in Beijing, May 14, 2017.

ONE BELT, ONE ROAD is ambitious. A network of roads, railways, ports, pipelines and other infrastructure that will crisscross China and Central Asia connecting to Europe and Africa via land routes (the Belt) and shipping lanes (the maritime Road).

It already covers two-thirds of the world’s population, one-third of global GDP and about a quarter of the world’s trade in goods and service.  China, President Xi Jinping announced at this weekend’s Belt and Road forum in Beijing (seen above), proposes to throw $124 billion at developing his vision of the next great engine of global trade.

Those monies would be a downpayment on what is estimated to be $900 billion of related investment, financed by a variety of Chinese or China-backed banks, funds and investing and development institutions. One Belt, One Road will, depending on your point of view, be 21st-century merchant hegemony writ large or the world’s largest platform for regional collaboration.

Leaders from 29 countries, the heads of the International Monetary Fund, World Bank, the UN, and a host of other dignitaries attended the forum this weekend, including most notably Russian President Vladimir Putin (absentees include the leaders of the United States, Japan and India). All the attendees, no doubt, will have had their private fears and hopes about the scale of this project to redraw over many decades the geoeconomic, and likely, the geopolitical map of Eurasia.

Whether China will hold the course, especially under Xi Jinping’s successors, is one question about the project. There are also legitimate concerns that some investment gets misallocated and ends up on being spent on ‘highways to nowhere’ and other projects that never should be built in the first place. Moreover, private and non-Chinese investment will be needed as well (and be a bellwether of global acceptance of the idea).

However, such is the scale of One Belt, One Road that even if only a fraction of it materialises, it will make Eurasia look a very different place.

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China’s First-Quarter GDP Growth Highlights Rebalancing Shortfalls

MORE UNRUFFLED WATERS for the Chinese economy–at least on the surface. First-quarter GDP growth, as reported by the National Bureau of Statistics, came in at 6.9% year-on-year.

That is its fastest pace in six quarters and the first back-to-back quarterly increase in GDP in seven years. The first-quarter number is also well in line with the 6.5% official annual growth target set last a month.

However, a closer look at the components of growth suggests that deeper currents swirl dangerously, and particularly that the old-school model of state investment-led growth still holds sway. Fixed asset investment in the first quarter, up 9.2%, was an acceleration from 2016’s 8.1% growth rate. Infrastructure investment rose by 23.5% while real estate development was up 9.1%. Industrial production also rose.

Worryingly for the rebalancing of the economy towards greater domestic consumption, retail sales growth slowed to 10% in the first quarter from 2016’s 10.4% expansion.

US President Donald Trump’s backing off from threatening a trade war with China because he needs Beijing’s cooperation in dealing with North Korea has provided breathing room for China’s economy, which it appears to be exploiting with some gusto.

The stimulus that Beijing has given the economy has led the International Monetary Fund to raise its forecasts for China’s growth this year and next in its latest World Economic Outlook to 6.6% and 6.2% respectively. That is 0.1 and 0.2 percentage points higher than its January forecasts and 0.4 and 0.2 percentage points higher than its October 2016 forecasts.

The question remains, however: how sustainable can this pace of growth be long-term without rebalancing taking more substantial hold and the problem of excess leverage being tackled?

As the IMF puts it:

The medium-term outlook, however, continues to be clouded by increasing resource misallocation and growing vulnerabilities associated with the reliance on near-term policy easing and credit-financed investment.

At some point, as prime minister Li Keqiang again emphasised, Beijing will have to switch growth gears. That will mean unwinding its most recent stimulus–very carefully. But that is unlikely to start happening until after President Xi Jinping has consolidated his political control at the critical Party plenum later this year.

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