Category Archives: Economy

The Renminbi Ups Its Status

100 yuan notes

THE INTERNATIONAL MONETARY Fund added the renminbi to its basket of Special Drawing Rights (SDR) currencies at the start of this month, thus officially marking it as a member of the elite club of global reserve currencies. It is a membership of which China has long been desirous.

The IMF had decided last November that China could join at the next scheduled SDR review, and that it would constitute 11% of the basket. That gives it the third largest share, behind the dollar and the euro but ahead of the other member currencies, the yen and sterling.

Weightings are meant to reflect the use of a currency in trade and the financial system so China may have been treated generously in this regard. It share of global payments, for example, peaked at 2.8% last year and is below 2% now.

Joining the SDR basket is, at this point at least, as much symbolic as anything, an acknowledgement of the global weight of China’s economy, and encouragement to push ahead with the financial reforms that would make the renminbi the freely usable and widely adopted currency that IMF reserve currencies are meant to be.

That, in turn, would promote more foreign interest in yuan-denominated assets, particularly bonds. Central banks and sovereign wealth funds will, however, build up their renminbi-denominated holdings only gradually.

Looking back in a decades time, though, the change may look more momentous, both if China’s financial markets become deeper and more liquid or it turns out that the renminbi was just the first of several emerging market currencies (India’ rupee is another candidate) to find a place in the SDR basket.

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IMF Bangs On A Familiar But Necessary Refrain

THE INTERNATIONAL MONETARY Fund has left its growth forecasts for China this year and next unchanged at 6.6% and 6.2%. However, in the newly published edition of its World Economic Outlook, the IMF notes that “China’s growth stability owes much to macroeconomic stimulus measures that slow needed adjustments in both its real economy and financial sector”.

Policy support and opened credit taps stabilised growth in the first half of the year close to the middle of authorities’ target range of 6½% –7% for the full year.

The Fund bangs on a familiar drum when it calls for more decisive action in tackling corporate debt and governance issues in China’s state-owned enterprises (SOEs). Lack of progress on these, it says, raises the risk of a disruptive adjustment from reliance on investment, industry and exports to greater dependence on consumption and services. Rebalancing could become ‘bumpier than expected at times,” the Fund warns. The current short-term stimulus on which China is relying and a still-rising credit-to-GDP ratio exacerbate that concern.

Credit dependency is increasing “at a dangerous pace, intermediated through an increasingly opaque and complex financial sector”. A combination of factors are at work here: “the pursuit of unsustainably high growth targets, efforts to prop up unviable state-owned enterprises to preserve employment and defer loss recognition, and opportunistic lending by financial intermediaries in the belief that all debt is implicitly guaranteed by the government”.

The IMF’s policy prescriptions are similarly familiar:
• address the corporate debt problem by separating viable from unviable state-owned enterprises, harden budget constraints and improve governance in the former while shutting down the latter and absorbing the related welfare costs through targeted funds;
• apportion losses among creditors and recapitalise banks as needed;
• allow credit expansion to slow and accept the associated slower GDP growth;
• strengthen the financial system by closely monitoring credit quality and funding stability, including in the nonbank sector; continue to make progress toward an effectively floating exchange rate regime; and
• further improve data quality and transparency in communications.

The medium-term outlook for China remains clouded by the high stock of corporate debt—a large fraction of which is considered at risk. And vulnerabilities continue to accumulate with the economy’s rising dependence on credit, which complicates the difficult task of rebalancing the economy across multiple fronts:

The medium-term forecast assumes that the economy will continue to rebalance from investment to consumption and from industry to services, on the back of reforms to strengthen the social safety net and deregulation of the service sector. However, non-financial debt is expected to continue rising at an unsustainable pace, which—together with a growing misallocation of resources—casts a shadow over the outlook.

Spillovers from China’s rebalancing and gradual slowdown via global trade and increasingly financial channels continue to concern the Fund. These have been significant, and China’s growing global role, the Fund says,  makes it all the more important for it to address its internal imbalances.

However, it also notes the other side of the coin:

The outlook for emerging market and developing economies will continue to be shaped to a significant extent by market perceptions of China’s prospects for successfully restructuring and rebalancing its economy.

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A Scorecard Of China’s Economic Rebalancing

A NEWLY PUBLISHED IMF Working Paper takes the measure of Beijing’s progress in rebalancing the economy away from investment and export-driven growth to high-value-add innovation-led industry and domestic consumption.

In summary, the paper says:

External rebalancing has advanced well, while progress on internal rebalancing has been mixed, with substantial progress on the supply side, moderate progress on the demand side, and limited progress on the credit side. Rebalancing on income equality and environment has also been mixed, with the energy intensity of growth falling and labor’s share of income rising, but income inequality and local air pollution remaining very high.

The author of the paper has also created a visual traffic-lights type scorecard, with data going back to 2010 and forecast out to 2021.
untitled-2

We have taken the liberty of taking a snapshot of where we are now based on 2015 or most recent available data (see Table 1, left).

The IMF has long been cheerily upbeat about the prospects for China’s economic development — no dramatic headlines generated by dire warnings of the rising risks of a banking crisis, as came from the Bank for International Settlements in its latest quarterly review published this week.

While the paper does acknowledge in this regard that the risk of “a disruptive adjustment” will increase significantly in the medium term, it also says that buffers such as foreign-exchange reserves are still large and able to help absorb potential financial shocks, although they will likely diminish over time, especially if reforms lag.

The paper also notes that demographic and structural changes will provide tailwinds to China’s rebalancing. It is certainly true that the rapid ageing China will experience over the next 15 years will turn the demographic dividend that has helped power growth for the past three decades into a demographic deficit.

The paper underlines that “successful rebalancing requires coordinated progress on various fronts. Going too fast on one area, while too slow on others, may derail the whole process.”

That is also not to say that significant policy efforts are not needed to get there.

Specific recommendations include:

  • continuing to move to an effectively floating exchange rate regime to prevent future foreign-exchange misalignments;
  • raising government health care spending to encourage a lowering of the savings rate (always a treat to see the austere IMF urging a communist country to increase state spending);
  • deregulating services to drive service sector productivity to offset the impact of labour being re-allocated away from the high-productivity industrial sector. This also comes with a warning of the dangers of deindustralising too early and too fast;
  • pushing ahead with the glacial pace of reform of state-owned enterprises to improve the efficiency of credit allocation.  Currently, 40% of industrial assets are managed by SOEs, with asset returns some 7 percentage points lower than their private counterparts, the paper notes; and
  • improving the redistributive role of fiscal policy through a more progressive tax structure, increased transfers and strengthened social safety net.

No surprises in that list. All the prescriptions are out of the IMF’s policy toolkit for China that the Fund has been using to cajole for reform.

 

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China’s R&D Gets Ever Bigger Bucks

TARIFF CUTS ON imports of some 200 IT products ranging from touch screens to semiconductors took effect on Thursday. The goal is to eliminate them within seven years.

China is one of 50 countries that signed up to a World Trade Organisation Information Technology Agreement last year to promote trade liberalisation of technology goods. China imports an estimated $325 billion worth a year of the components covered by the agreement. Reducing the duty on them will cost an estimated $2.25 billion a year, rising to a potential $8 billion a year with complete elimination.

However, the benefits of cheaper imports for the IT sector are seeing as outweighing these costs. Beijing is undertaking a drive to promote the development of technology-based industries. To this end, it is also raising research and development spending to 2.5% of GDP by 2020 from 2015’s 2.1%, a change that eventually will fatten China’s R&D pot by $50 billion a year.

Intensification of investment into R&D facilities outside China parallels this. So far this year, Chinese companies have announced nine new overseas R&D centres for a total capital expenditure estimated at $224m, according to fDi Markets, a Financial Times division, with pharma and biotech investments particularly prominent. Only Germany and the United States have spent more.

That will support the transformation of the manufacturing economy from low-end exports to self-sustaining indigenous technological innovation, an essential prop for the rebalancing of the economy overall towards being consumption-led.

Winning domestic market share is the aim for now of Chinese firms’ R&D efforts.  The success some are having is creating an indigenous innovation culture built around rapid, incremental product development that can take advantage of the economies of scale of the domestic market.

However, Chinese firms are closer than ever to competing with developed-economy companies in R&D. Products they are now selling in Africa and Asia, as well as at home, are starting to show the results of that, a harbinger of what will eventually come to developed markets, too.

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China Gets Its UK Nuclear Prize, Probably

THE UNITED KINGDOM’S decision to go-ahead with three nuclear power plants, the first at Hinkley Point, has had a somewhat surprisingly gruff welcome from state media.

Shortly after taking office in July, UK Prime Minister Theresa May ordered a second look at the projects, which were approved by the previous administration. This was to include cost and environmental concerns but also a security review of China’s involvement, which includes part-financing new reactors at Hinkley Point and Sizewell, both to be built and operated by France’s EDF, but also leading the construction and operation of a reactor at Bradwell to indigenous Chinese designs.

“However, in spite of the approval, China-phobia sentiments continue to hover and could possibly introduce more troubles as construction of the project gets underway, a Xinhua commentary thundered. “It is reported that while announcing the go-ahead, Theresa May has also promised ‘significant new safeguards’ to make sure that investment from China does not threaten national security. Of course, the British leader’s misgivings make little sense.”

The new safeguards give the British government a veto over sales of full or partial ownership of the reactors both while they are being built and then operated, and institutes national security reviews for future critical infrastructure projects, a practice that is common in most large economies, including China.

There had been dire warnings from the Chinese side when May announced her review that abandoning the projects would end the ‘golden era’ of Sino-British relations championed by her predecessor David Cameron and his finance minister, George Osborne.

“Let us hope that London quits its China-phobia and works with Beijing to ensure the project’s smooth development, Xinhua’s commentary continued.

Its testiness underlines the uncertainties that still surround the projects. China is desperate that Bradwell goes ahead to give it a key early sale to a developed nation of its still untried Hualong One reactor. Beijing hopes that will lead the way to a global export market for what a senior official at China General Nuclear Power estimates will be some 200 nuclear power plants.

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Data doubts

Abacaus. By HB (Own work) Public domain, via Wikimedia Commons

THIS BYSTANDER HAS long not given undue credence to the case that China’s economic data misrepresent the real state of the economy — or at least they don’t misrepresent it any more than any other country’s data.

That assertion comes with a bunch of caveats, notably that counting the output of any economy is fiendishly difficult, and especially one as large as China’s. Also, as nations evolve from being manufacturing- to services-based, the task gets even more challenging.

The way the world counts GDP was designed for an industrial era where there were hard outputs to measure:  ingots of steel;  sacks of coal; trucks full of widgets. In a services-dominated economy, GDP, which is, after all, no more than the value of the output of goods and services, can be increased merely by having bankers raise their fees.

China has a track record of announcing GDP data closely aligned with official targets. It is reminiscent of the way the General Electric Corporation in the United States in days past used to report quarterly earnings bang in line with the guidance it had given stock analysts.

Smoothing earnings, that was called. State planners would appreciate the technique if anyone would.

China’s national GDP number is derived from data collected across the country and while the National Bureau of Statistics fields a team of more than 20,000 data collectors, they still need local assistance.  The importance, real and symbolic, that Beijing attaches to the overall GDP figure is an incentive for local officials and state-owned enterprises to bolster the numbers they furnish.

President Xi Jinping has set a national target of doubling output and income levels by 2020, goals that demand annual GDP growth to average 6.5%. Patriotic statistical duty becomes self-evident.

Longstanding readers may recall Prime Minister Li Keqiang once saying that the country’s GDP data was “man-made” and that measures such as electricity consumption and freight volumes carried by rail were better indications of economic growth.

However, it is almost a decade now since he said that — and analysts named a now barely remembered index of such proxies after him.

China’s national statistics have become much more robust over the ensuing period, particularly those for industrial output which a decade or more back had known methodological flaws in their collection. Paradoxically, those have been mostly fixed just in time for industrial data to become relatively less important than that for services in the overall GDP number.

Similarly, measures like electricity consumption have become less reliable indicators of growth as the economy has become a more efficient consumer of power. Furthermore, is that electricity being used to run a mill or a mall?

Wang Baoan, the disgraced head of the National Bureau of Statistics who has been brought down by the anti-corruption campaign, had once said that tax data supported his office’s GDP numbers — not that that is an assertion that can be easily verified by outsiders.

In short, China’s numbers may have a wide margin of error, and state statisticians have become adept in optimising the GDP deflator used to convert between nominal and real growth (underestimating the inflation measure will give an impression of faster real growth), but fudge is not the same as fabrication.

For one, policymakers themselves need a more not less accurate GDP number to direct the economy along its decelerating glide path towards ‘rebalance’. Even China would be unlikely to be able to conceal the existence two sets of books indefinitely.

China now publishes so much economic data that evidence of activity, in piecemeal parts of the economy at least, is hiding in plain sight. Perhaps the one thing that can be said with certainty is that both the official statistics and the numbers proffered by their critics are now mostly headed in the same direction.

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August 27, 2016 · 4:06 pm

China Eyes Global Nuclear-Reactor Export Market

 

A model of a Hualong One (HPR1000) nuclear reactor

An export that glows in the dark: a model of a Hualong One (HPR1000) nuclear reactor

THE REAL PRIZE for China in the United Kingdom’s nuclear industry is not Hinkley Point but the plant at Bradwell that is planned to come after — and all the foreign sales of its new nuclear reactors that may come after that.

China, though the state nuclear company China General Nuclear Power Group (CGN), will finance one-third of the £18 billion ($23.5 billion) cost of Hinkley Point C, which will be the UK’s first new nuclear plant in decades. The other two-thirds and the technology will be supplied by the French utility EDF.

The deal gives EDF a showcase that it hopes will offset setbacks in projects in Finland and France for its latest design of reactors, but CGN gets a toehold in western Europe. Bradwell would be built using an indigenously designed Chinese reactor.

It would also be a key early sale in what could be a global export market for, at best guesstimate, at least 130 nuclear power plants. At $15 billion-25 billion each, that adds up to a decent chunk of change. China’s nuclear industry has its eyes firmly on the prize.

Beijing has enthusiastically pursued nuclear power domestically as a low-carbon energy source. As of March, there were 33 nuclear reactors operating in the country, with a total capacity of 28.8GW. A further 22 were under construction with a capacity of 22.1GW. The goal is for nuclear to generate 6% of China’s electricity by 2020, against 2% now.

Other countries are warier of nuclear power, and in particular since the accident at Fukushima in Japan in 2011 (which also caused a temporary suspension of new plant building and approvals in China while new nuclear safety rules were drawn up).

Earlier this month, the new British government of prime minister Theresa May put Hinkley Point on hold for further review.

First, there are the perennial environmental and safety concerns about nuclear energy.

Second, there are concerns about the economics of the deal. The UK government gets out of the upfront building costs and plugs a looming energy shortfall, but it has had to guarantee a price for the electricity Hinckley Point will produce that is twice the current wholesale price — and to do so for 35 years.

In the complex economics of energy pricing that may not prove to be as expensive in the long term as it looks, but the sums — and their underlying assumptions — certainly warrant a second look

Third, May is said to be concerned about China’s involvement, both on grounds of national security and because she has long been critical of the ‘gung-ho’ approach to Britain’s welcoming of Chinese inward investment championed by her predecessor administration of David Cameron and in particular by his finance minister George Osborne.

Osborne and May have long had a distrustful political relationship. Replacing him as finance minister was one of her sets of appointments.

State media have been admonitory of the last-minute delay, saying that cancellation of Hinkley Point could threaten what President Xi Jinping called the ‘Golden Era’ of China-UK investment relations during his state visit to the UK last year. Beijing’s ambassador to Britain, writing in the Financial Times this week, called the times a ‘crucial historical juncture’.

In October last year, before the ‘Brexit’-induced change of prime minister, the UK had reached a strategic investment agreement with China covering three nuclear power plants:

  • Hinkley Point C;
  • an investment in Sizewell that will also use French EPR reactor technology; and
  • Bradwell, whose construction China was expected to lead and which will use Hualong One reactors.

The Hualong One has evolved from upgraded Chinese versions of the French 900MWe class pressurised water reactors already widely in use in China. CGN has developed it jointly (at Beijing’s direction) with China National Nuclear Corp. (CNNC).

The Hualong One is considered to be a ‘third-generation-plus’ reactor, which means it complies with the post-Fukushima safety requirements. It is entirely Chinese designed and intended for sale in international markets as well as domestic deployment.

A Hualong One nuclear reactor under construction at FuqingSix are to be built in China, according to CGN. The International Atomic Energy Agency lists three as under construction. The one in Fuqing in Fujian province is shown to the left.

Internationally, two are to be built in Pakistan and a third is planned for Argentina. CNNC chairman Sun Qin has been quoted as saying that China plans to build 30 nuclear power units in countries along its “One Belt, One Road” initiative by 2030.

Bradwell, though, would be the first build in a developed economy. As such, it would be a highly prized sale that China does not want to let slip through its grasp.

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