Tag Archives: China

The Appearance and Reality of Resisting Stimulus In China

NEW MONTHLY ECONOMIC indicators confirm the slowing of China’s economy. Growth in retail sales, industrial production and fixed-asset investment all decelerated in October. Nonetheless, central bankers are likely to hold fast against calls for across-the-board stimulus.

A political and an economic reason underpins that view. The first is that old-school pumping of money into the economy that will only flow through to infrastructure investment runs counter to top leadership’s plans to redirect the economy away from investment- and export-led growth to domestic consumption. The People’s Bank of China is a champion of economic reform. It does not wish to be seen to be falling back to the old ways any more than it can help.

The second is that even if it cut interest rates or lowered the banks’ capital reserve requirements, the money freed up is unlikely to find its way to where it could do most good, privately owned small and medium sized businesses. Such businesses don’t have access to the corporate bond market and rely on banks for financing. However, banks have become wary lenders except to the largest and state-owned enterprises that don’t need the money.

The central bank has the room to ease should it choose to do so. Inflation remains subdued, and the economy grew in the third quarter at its slowest rate since the 2008 financial crisis. Against that, the unemployment rate, more closely watched than the GDP number in Beijing these days, is steady. And growth, though slowing, as expected, is not threatening a hard landing.

Targeted stimulus will continue, regardless. The National Development and Reform Commission, the top economic planning agency, has put 21 projects worth $113 billion, including 16 railways and five airports, on the fast track.

The central bank has also quietly been making liquidity available to the banks through its medium-term lending facility. Such loans are a back-door way to push down interest rates without sending an easing signal. It is also three-month money that disappears after that time without also sending a countervailing tightening signal.

The central bank can always roll over the loans after three months should it choose to do so — although by the time they mature the economy may have gotten back on track through the simple expedient of lowering the official GDP target.

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Xi Blows Hot And Cold Over Apec

The Asia-Pacific Economic Co-operation Summit (Apec) in Beijing brought together the leaders of the world’s three biggest national economies, President Xi Jinxing, Japan’s Prime Minister Shintaro Abe and U.S. President Barack Obama. It was not a particularly happy confluence.

While Xi and Abe shook hands  — the first meeting of the leaders of China and Japan for more than two years — the rest of the body language was scarcely cordial. Icy, in fact. The tension over the two nations’ maritime territorial dispute in the East China Sea won’t easily be shaken off.

Obama arrived bearing gifts, extensions to the terms of multiple entry visas, from one year to 10 for business people and tourists, and to five years for students. But while China and South Korea agreed to sign their proposed bilateral free-trade agreement (FTA), the U.S-led Trans-Pacific Partnership (TTP) continued to tread water. Nor did the U.S. make any apparent progress in its negotiations to update the 18-year old agreement it has with China on trade in high-tech goods and services.

If anything, in rounding out its FTAs with Japan and the U.S. by signing one with China, South Korea has less need to pursue membership of the TTP with any urgency. While that could be read as score one for Xi, similarly Seoul also has less need to pursue the Beijing-proposed rival to the TTP, the Free Trade Area of the Asia-Pacific (FTAAP). Washington has been, behind the scenes, resisting that determinedly, though it couldn’t prevent Apec leaders agreeing to a two-year study of the scope of an FTAAP. That wasn’t as much movement towards a drawing up a roadmap as Beijing wanted, but it was still more ground than Washington had wanted to yield.

The summit was Xi’s show, his first big international meeting since he assumed power, and an opportunity to show how China is increasingly dictating the region’s pecking order. In the group photograph at the end of the summit, Russia’s Vladimir Putin is standing next to Xi on his right. The two countries signed a big oil-and-gas deal ahead of the summit and promised further cooperation. Obama is down the line to Xi’s left, halfway to the end of the front row. Abe is relegated to the second row.

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October PMIs Suggest China’s Economy Slowing As Intended

THE LATEST BATCH of monthly purchasing managers’ indices (PMI) can be read anyway you wish. This Bystander’s standing caveat about drawing conclusions from a single month’s data applies.

The official PMI for October came in at a lower-than-expected 50.8, down from the previous month’s 51.1. The revised HSBC version, which is weighted more towards small and medium sized enterprises than the official PMI, came in 50.4, the same number as the preliminary version and up from the 50.2 figure for September.

Readings above 50 indicate that the economy is expanding. Growth in new orders and new export orders in October — proxies for domestic and foreign demand, respectively — slowed to their lowest in four to five months, but remain above that watershed.

These latest numbers confirm the longer view that the economy continues to grow, but slowly by recent standards, and patchily. But then uncertain exports and a cooling of both the property markets and investment growth is what rebalancing the economy towards more sustainable growth is meant to look like.

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World Bank Adds Its Voice To Those Calling For China To Slow Its Growth

THE WORLD BANK is lending some international credibility to China’s likely switch to a 7% annual GDP growth target next year. In its latest economic update the Bank says 7% growth would not hurt China’s labor market, an indicator watched closely by the leadership in Beijing for any sign of incipient social unrest.

Attempting to sustain the current offical target of 7.5% annual GDP growth hampers the government efforts to rebalance the economy towards being driven by domestic consumption, the Bank says. “The current emphasis on meeting short-term growth targets will make it more challenging to implement the policies necessary to shift growth to a more sustainable medium-term path.”

In that the Bank echoes the words of the International Monetary Fund. In July the Fund said that Beijing should set a growth target of 6.5%-7% for 2015 and not introduce any stimulus measures unless the economy looked likely to decelerate to a pace below that.

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China Becoming A Net Capital Exporter Could Boost Domestic Bond Market

WHAT DOES IT mean that China is set to become a net exporter of direct investment capital for the first time?

Outbound foreign direct investment (FDI) reached $75 billion in the first nine months of the year, up 21.6% on the same period a year earlier. Zhang Xiangchen, a senior official at the commerce ministry, said last week that it looks as if outbound FDI will exceed inbound FDI over the full year, and if not this year then certainly next.

Inbound foreign investment at $87.4 billion between January and September was down 1.4% from the same period of 2013, itself a record year at $118 billion.

A degree of caution is in order when considering these numbers. Most inbound FDI comes from Hong Kong, Taiwan and Japan. Influences on flows from three places are different to the considerations weighing on the minds of European and American executives pondering investments in operations in China.

Passing the net-capital-exporter milestone was already a matter of if not when. China has $4 trillion in foreign-exchange reserves, an official policy to push Chinese companies out into the world, and an easing back from encouraging inward investment to acquire technology and know-how. The Chinese economy is suffering from chronic domestic over-investment, so the rate of outbound FDI is only likely to increase as Chinese companies hunt for acquisitions abroad.

One question is whether they will avoid the excess of the Japanese companies before them who trod a similar path in the 1980s and ended up paying pretty fancy prices for some assets. Another is the extent to which portfolio investment will become the swing factor in overall capital flows.

The conditions are there for it to do so. Net FDI flows are turning negative. Inbound FDI accounts for less than 3% of fixed-capital formation, down from 6.8% before the 2008 global financial crisis. Exports account for a diminishing share of the economy — at 1% of GDP they are one-tenth as important as in 2007.

Portfolio investment inflows can be a challenge for any economy as they are fickle. If they are to become more important to China’s capital account, then development of domestic financial markets, and particularly the domestic bond market, becomes even more urgent.

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Party Plenum Indicates Limits To Xi Jinping’s Power

THIS BYSTANDER DRAWS two points of note from the recently concluded Fourth Party Plenum, the four-day annual meeting of China’s 350 most powerful officials. The first is that President Xi Jinping has not centralized power as comprehensively as has been supposed. The second is that there is a distinction between the rule of law and rule by law.

Both points are significant in their separate ways. Xi needs to centralize power if he is to remove the obstacles that the most entrenched vested interests pose to his economic reforms outlined at the previous Party plenum. Xi wants to switch the economy from investment- and export-led growth to domestic consumption. It is a change to a no longer sustainable credit fueled model of growth that powered the past three decades of China’s rise as transformative as the policies of Deng Xiaoping that initiated it.

Xi sees his legacy as being on the same historic scale. Yet there are many powerful Party, state and military elites who have benefited in privilege and pocket book from the old economic model, and will not readily give it up. While Xi has extended his power to coerce them to do so faster than many had expected before he became China’s pre-eminent leader, this plenum has shown that his drive to centralize power is not yet complete.

The PLA is a case in point. It holds a special place in the country’s politics for the obvious historical reasons and has considerable policy autonomy. With China taking on a greater global role, such autonomy gives it more opportunity to calibrate China’s “assertiveness” than may always be comfortable for Beijing. It also has extensive industrial and commercial interests from which senior members of its old guard profit

The plenum had been expected to approve a reshuffling of the Central Military Commission to promote allies of the president. On the basis of the communique issued after the meeting, that did not happen.

Nor was any light shed on the fate that is to befall Zhou Yongkang, the former Politburo Standing Committee member who is the biggest tiger to fall prey to Xi’s anti-corruption drive and the highest ranking Party member be investigated for corruption in many a year.

On both scores, that suggests divisions of view at the top. At the very least, there are still obstructions that Xi feels he cannot yet move.

The communique’s main point of commission as opposed to omission was changes to the judicial system, the plenum’s headline issue. The Party remains firmly in control of the legal process; a democratic separation of powers was never on the agenda, even though many believe that China will not be able to make the economic transition Xi desires without commensurate institutional political, social and legal changes.

For any foreseeable future, the judiciary remains subordinate to the leadership of the party and national security. Top leadership will still be able to control cases at the provincial or national level in which it has a pressing political interest. Rule by law; not rule of law.

That has tempted some commentators to suggest that nothing is changing. There are significant changes at the lower levels, however. Local judges will no longer be appointed and funded by local officials but by provincial or national authorities. That should break the commonly cosy relationship between local officials and local courts. It would then be more difficult for corrupt local officials to remain immune from accountability, a widespread popular grievance.

That in itself won’t shift for Xi any of the big obstacles blocking his economic reforms. It will, however, help to break up the endemic institutionalized corruption at the level that has the most impact on most people’s daily life. If he is still not able to move all the big rocks at the top that he would like, he can still remove a mass of little obstacles at the bottom.

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China’s Natural-Disaster Displacement Risk Quantified

China: Disaster-related displacement, 1970-2013. Source: IDMC

China: Disaster-related displacement, 1970-2013. Source: IDMC

CHINA ACCOUNTS FOR a disproportionate share of the world’s disaster-related displacement. That is not only a function of the size of its population. The country is at high-risk of being stricken by drought, seasonal floods, cyclones, earthquakes and landslides induced by the latter two.

Drought and cyclones are the most costly; earthquakes and floods the big killers. Some 130 million inhabitants are exposed to these risks. More than 8 million of them every year are at risk of being displaced, according to a new analysis of regional displacement risk by the Internal Displacement Monitoring Centre (IDMC).

Disaster-induced displacement has been increasing and is likely to continue to do so. For one, population growth and the increased concentration of people and economic activity in hazard-prone areas such as coastlines and river deltas are swelling the numbers of people exposed to natural hazards.

Second, better early warning systems and evacuation planning means that more people survive disasters even as their homes and property are damaged or destroyed. Third, climate change is making extreme weather both more frequent and severe.

The richer a country gets, the more resilient it is to natural disasters, not least of all because it has more to lose, so they take steps to protect what they have. Yet though they suffer fewer natural disasters those that do occur are more severe.

Since 2008, China has suffered three disasters that displaced more than 3 million people, five that displaced 1 million-3 million people and 34  that displaced between 100,000 and 1 million people.

All that helps explain why China has the highest absolute risk of disaster-related displacement in the region. It also ranks second in relative displacement for its population size — 6,082 displacements per million residents, after Laos’s 6,542 displacements per million inhabitants.

The IDMC predicts that over the next four years that the average number of displaced will rise to nearly 9 million and the per million ratio will rise to Laos’s current level.  Its study, which is regional, is intended to provide a forecast to help planners not so much to deal with natural disasters as to forestall their worst effects.

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China’s Economy Steadies As She Slows

CHINA’S THIRD-QUARTER GDP growth number, at a 7.3% year-on-year, was a tad better than expectations, though not sufficiently so to prevent gloomy headlines about it being the slowest growth since the global financial crisis of 2008.

Fears that growth was slowing too quickly can be set aside for now. The selective stimulus applied earlier in the year is starting to work its way through the economy. Policymakers will likely feel that they will need only the lightest of hands on the monetary tiller in the fourth quarter to hit the officially fudged growth target of about 7.5%

One important sign of stabilization is a pick-up in industrial production. Manufacturing output was up 8% year-on-year in September, after August’s abrupt slowdown to 6.9% growth. Fixed asset growth slowed to 16.1% from 16.5% in August, a reflection of the sluggish real estate market, though the national figure conceals a two-track property slowdown at the city level.

The black cloud is that retail sales’ year-on-year growth slowed to 11.6% in September from 11.9% in August, suggesting that little progress is being made towards rebalancing the economy towards greater domestic consumption. It is that that is needed most to ensure China is safely on the long glide path to slower but more sustainable long-term growth.

 

 

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Summers Sees Possible Abrupt Slow Down In China’s Growth Rate

CHINA, AND INDIA come to that, will grow much less rapidly than is currently anticipated. That forecast comes from former U.S. Treasury secretary Larry Summers and Lant Pritchett, a colleague of Summers at Harvard’s Kennedy School of Government, in a newly published working paper from the National Bureau of Economic Research in the U.S.

The pair say that regression to the mean is the strongest predictor of long-term economic growth; witness other fast-growing countries such as Japan. Pritchett and Summers expect China’s growth rate to slow to 3.9% over the next two decades, and India’s to 3%.

High levels of authoritarian political rule, corruption and extensive government meddling in business, the authors also argue, make slower growth even more likely. They also note that while “China’s growth in the past 35 years has been remarkable, and that nothing in our analysis suggests that a sharp slowdown is inevitable,” such phases of super-rapid growth tend to end “abruptly.”

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Facing A Slower Chinese Economy, Xi Needs A Winning Party Plenum

THE INTERNATIONAL MONETARY FUND held its forecasts for China’s GDP growth this year and next unchanged in its latest quarterly economic outlook even as it trimmed those for the world economy. It is still expecting 7.4% GDP growth this year, slowing to 7.1% in 2015, down from 7.7% in both 2012 and 2013. “China is sustaining high growth, but slightly lower growth in the future is seen to be a healthy development,” the Fund says.

For this year, the IMF is projecting that the economy will come up just short of the official growth target of 7.5%. After a slower than expected first-quarter, Beijing launched a number of stimulative measures to get the economy back on track for hitting that target. These included tax relief for small and medium businesses, accelerated fiscal and infrastructure spending, and selective cuts in banks’ required reserve ratios.

But with the  property market still weighing on the broader economy, GDP in the third quarter, due to be announced on October 21st, is likely to confirm that growth continues gently gliding downwards, somewhere in the 7-7.5% range is this Bystander’s best guess. We expect some more if modest stimulus in the fourth quarter to make sure the full-year number comes out as close to the higher end of that range as possible. Prime Minister Li Keqiang is only the latest official to blur what counts as 7.5%; about 7.5% will be close enough.

It is likely that next year’s official target will be lowered to a more realistic 7% as the economy makes the transition to more sustainable long-term growth through rebalancing demand away from investment toward consumption, and the property market, especially residential investment, remains sluggish. However, infrastructure investment and credit will remain the main drivers of growth next year.

Excess industrial capacity and the dark shadow of provincial and municipal debt remain the main risks to the growth forecast along with the deflation of the property market getting out of hand. While the government has great capacity to absorb such a hard landing, that capacity isn’t infinite, and the policy challenge is exacerbated by the two-tier property market that has emerged in China. Bubble prices persist in large cities while small cities are experiencing a property recession thanks to overbuilding spurred by local governments desperate to spur growth.

A too-fast slowdown in property prices would work through to the banking and shadow banking system in short order. The IMF rightly notes in its report the importance of reforms to buttress financial sector stability:

It is crucial to implement key elements of the authorities’ structural reform that aim to strengthen the regulation and supervision of the financial sector, reduce implicit guarantees, liberalize the deposit rate, and use interest rates instead of quantitative targets for the implementation of monetary policy, thus encouraging market-based pricing of risks. Further expansion of the social safety net, by reducing the current high rate of social security contribution, and better health care benefits would help reduce household saving rates and raise domestic consumption.

More broadly, China needs to structural reforms to its education, labor and product markets to raise firms’ competitiveness and productivity while lowering credit growth and local government borrowing. All that touches just about every vested interest. That is meat for the forthcoming Fourth Party Plenum.

Last year’s Third Party plenum announced the need for reforms to strengthen social safety nets and the social security system as part of a 60-point blueprint sketched out for President Xi Jinping’s plan to rebalance the economy. This year’s plenum, due to start on October 20th, has as its first objective the consolidation of Xi’s rule of law cum anti-corruption drive — which will be a proxy for the jockeying for power and influence between Xi and his predecessors Jiang Zemin and Hu Jintao.

While Xi has moved faster to consolidate his power base than might have been expected, his ability to advance his economic-reforms agenda will require the backing of Jiang and Hu and their respective Shanghai and Communist Youth League factions. The appearances at National Day celebrations of some senior figures in the Party and army thought to be the subject of anti-graft investigations and who have not been seen in public recently suggests Xi may be rallying unity in the ranks to that end.

Xi may well feel his best next tactical move for economic reform will be to revamp the 100-or so central-government controlled state-owned enterprises to improve their business performance and governance. These are the big dogs in the economy, and entrenched obstacles to reform in their various sectors. Making them over would have the added bonus for him of weakening some of the power bases of those not aligned with him.

The trick for Xi remains aligning the political realities he faces with the underlying structural slowing of economic growth, but without getting too close to the feared hard landing of the economy that would undermine his political position. As we have noted before, every mini-stimulus ratchets up a notch the difficulty of introducing the policies needed for rebalancing because they don’t address the underlying causes of unsustainable booms and the vested interests that benefit from them. And that needs a political solution before it can get an economic one.

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