Tag Archives: growth

Policy Shift Will Favour China’s Tech Platform And Real Estate Firms

THERE IS LITTLE doubt that China’s economic managers are ruffled. The combination of economic headwinds from the war in Ukraine to Covid’s resurgence with its large-scale lockdowns and the uncertainty over the global economy caused by inflation, supply chain chaos and tightening monetary policy are as disruptive as they were unanticipated.

The readout from Friday’s Politburo meeting was a clear recognition that the leadership understands the straitened state of the economy. Thus it is switching the balance of policy priorities from regulation and structural change back to growth.

Evidence of that can be seen in the Politburo’s signalling of an end of the campaign to ‘rectify’ the platform tech companies that started in late 2020, and its declaration that there needs to be liquidity support for beleaguered property development firms.

The English-language version of the readout put less emphasis on continuing regulation of the tech sector than the Chinese version, which, similarly, was clearer that controls on real estate speculation would continue. 

If that was an attempt to send different messages to domestic and international audiences, it strikes this Bystander as cack-handed.

Many international investors have recently turned bearish about China and moved capital out, believing the economy is in worse shape than even the official figures suggest, exacerbated by adherence to the zero-Covid policy.

However, they will judge the concrete support for the ‘healthy’ development of the platform tech and real estate sectors on its merits rather than its promise. That support will come sooner rather than later.

The government wants both sectors to thrive, especially now, but in a way that serves central policy objectives more directly than before. 

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Central Bank Will Bolster China’s Financial Markets Ahead Of Reopening

THE PEOPLE’S BANK OF CHINA will inject a single-day record 1.2 trillion yuan ($170 billion) into the economy on Monday to ensure ample liquidity in the financial system when financial markets reopen after the extended Lunar New Year holiday.

The net number will be closer to 150 billion yuan because short-term funds worth some 1 trillion yuan mature tomorrow. However, the move reflects the growing concern about the economic impact of the Wuhan coronavirus outbreak.

The tourism and travel industries have been hardest hit with the clampdown on travel over the Lunar New Year holiday. Numerous businesses, domestic and multinational, have shut retail outlets and suspended factory production.

The central bank says it stands ready to make further liquidity injections in coming days if necessary.

Other economic support measures include relaxing tariffs on imports of medical supplies, central bank support for lower bank lending rates to support companies and delayed introduction of new asset management regulations that were part of the crackdown on shadow banking.

It is far too early to estimate the economic impact of the outbreak. Public health emergencies such as this tend to cause short-term economic dislocation but little long-term damage. As the control measures for the coronavirus outbreak have been so draconian, the near-term economic costs could be severe, depending on how long the outbreak continues. Some economists have predicted that it could shave as much as a percentage point off economic growth in the first quarter.

Update: Chinese stocks closed down 7.9% on February 3 after financial markets reopened following the Lunar New Year holiday. The fall in the CSI 300 index of Shanghai- and Shenzhen-listed equities wiped out some $358 billion of market capitalisation.

As of the end of February 2, there were 17,205 confirmed cases of the Wuhan coronavirus officially reported in China and 361 deaths.

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Asian Development Bank Pushes Beijing On Tax Reform

Headquarters of the Asian Development Bank in Manila, Philippines, seen in 2016. Photo credit: ADB. Licenced under Creative Commons CC BY-NC 2.0

CHINA’S ECONOMY WILL grow by 6.6% this year and 6.4% next, according the Asian Development Bank’s newly published Outlook 2018. That is pretty much in line with the most recent revised OECD forecasts from mid-March.

The ADB sees strong consumer spending, rising exports and steady public spending underpinning current growth. It also joins the chorus calling for tax and other structural reforms to ensure that growth is both inclusive and sustainable as it resumes its measured glide path of slowing under the effects of excess-capacity reduction, the gradual resolution of the debt problem and the shift of growth drivers from capital accumulation to total factor productivity, to give a more technical description of the rebalancing of the economy.

In summary, the ADB says:

PRC growth accelerated on strong demand from home and abroad. The service sector grew by 8% on buoyant domestic demand, and net exports expanded as trade in intermediate manufactures rebounded. Assuming mildly tighter monetary and fiscal policies in the PRC, growth is expected to moderate from 6.9% in 2017 to 6.6% in 2018 and 6.4% in 2019. Further progress on reforms such as strengthening financial sector regulation and supervision, and addressing debt issues would lay a foundation for solid macroeconomic stability.

The ADB highlights the importance of services to rebalancing. In 2017, it notes, services were already the main driver of growth, expanding 8%, up from 7.7% the previous year, and contributing 4.0 percentage points to GDP growth. In contrast, industrial growth slowed to 6.1% last year from 2016’s 6.3%, and industry’s contribution fell to 2.5 percentage points.

The services sector also kept the labour market buoyant, creating 13.5 million new urban jobs last year (exceeding the official target of 11 million). But prices in the service sector are rising, meaning that inflation did not cool as much as it might otherwise. Consumer prices rose 1.6% in 2017, against 2% a year earlier. The ADB thinks inflation will pick up this year, to 2.4%, as consumer demand strengthens.

The ADB also notes in passing that services comprise barely 51% of GDP, low by international standards. As investment, in contrast, at almost 40%, is comparatively high, there is ample scope for further ‘rebalancing’.

The risks to the ADB’s forecast are pretty straightforward: a trade war with the United States, which could undercut exports and investment. It is not particularly worried about the tariffs the Trump administration imposed on steel and aluminium imports, seeing an unintended benign consequence of measures to tackle the corporate debt issue:

Prices for aluminum and iron ore (iron being the bulk of stainless steel) rose by 23% in 2017. This raised profits in the producers’ home economies more than enough to offset the impact of tariffs, had they been imposed a year earlier. Profits in heavy industry, including large steel producers in the PRC, rose by 21% in 2017 thanks to higher prices and government-imposed production quotas, allowing these industries to service their debt and reduce borrowing while trying to shed excess capacity. Thus, these producers should be able to manage lower demand expected from the US, given the small share of exports to the US directly affected.

However, it is the United States’ next round of tariffs on Chinese exports of intermediate inputs, especially for renewable energy, electricity generation and electrical and optical equipment, that is the immediate concern as they could undermine the business and consumer optimism. Absent Trump’s ‘massive trade deal’ with China, these will take effect in the next few months and would play directly into investment intentions, and especially those connected to US firms’ links to Asian value chains in manufacturing.

The double risk is that a strengthening dollar on the back of rising US interest rates could also spur greater capital outflows, irrespective of authorities’ discouragement.

However, the ADB believes, the government’s fiscal strength and political will enable the economy to weather any squalls. The question for this Bystander is how stormy the trade can weather get.

The particular area for structural reform tha is exercising the ADB is tax:

[The] ratio of tax revenue to GDP has stagnated at 17.5%, with heavy dependence on indirect taxes in the PRC atypical at its stage of development. The authorities there should broaden the tax base while ensuring that the revenue system is progressive.

The average tax revenue to GPP figure for OECD countries is 25%, and even in the ten emerging economies of the G20 countries, it is 21%. The combination of falling tax revenue and rising expenditure translates into rising budget deficits for Beijing, more public debt and thus contingent liabilities.

The ADB suggests that there is there is substantial potential to raise more revenue from personal income taxes, which are now paid by fewer than one in five wage earners. Personal exemptions are twice the annual average national wage, and the top rate (45%) kicks in at 35 times the annual average national wage. OECD averages are for personal exemptions of one quarter the average annual national wage and top marginal rates starting at four times that level.

This indicates some easy changes that could be made to broaden the income tax base and make it more progressive. (which are in train as was signalled at last month’s National Peoples Congress sessions). Structural tax reform is also central to tackling income inequality, a central concern of the Xi administration.

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China’s Economic Rebound Continues

Another clutch of monthly economic indicators confirm that the slowdown in the economy is done. Factory output, up 10.1%, and retail sales, up 14.9%, hit eight-month highs in November. Even the uptick in inflation to 2% can be read as a sign of recovery. It seems that policymakers’ holding of their nerve through the slowdown and not over-stimulating has borne fruit in a rebound with benign inflation. Monetary and fiscal policy is likely to continue as is for now. Growth for the year is likely to come in comfortably if not excessively above the official target of 7.5%, which will set the pace for 2013 and subsequent years.

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ADB Holds China Growth Forecast Unchanged Even As Region Slows

In its latest quarterly update, the Asian Development Bank has left unchanged its growth forecast for China this year at 7.7%, with 8.1% growth still seen in 2013. The Bank says that October’s rebound in industrial production likely signaled the end to the third quarter soft patch. Retail sales also remained resilient.

Despite the weakness the Bank sees in the global economy, it expects China’s fourth quarter growth at 7.7% to exceed that of the second and third quarters, and that growth will again top 8% in the first quarter of 2013. The Bank sees growth in other East Asian economies slowing, however. It trimmed its 2012 forecast for the region to 6.4% from the 6.5% it forecast in October, and that for 2013 to 7.0% from 7.1%.

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Wen’s Words Buck Up China’s Slowing Economy

Avuncular Uncle Wen is always the man to send to uplift spirits and spread reassurance when natural disaster strikes or times are trying. This week, China’s prime minister has been dispatched to his home turf, the economy, which has just reported its seventh consecutive quarter of slowing year-on-year GDP growth at 7.4% in the third quarter. And he is at his most upbeat. He says the slowdown has stabilized, and the official target of 7.5% annual growth for the full year will be achieved.

When it was first announced in March that target seemed a ridiculous low-ball of a number, one that would be easily exceeded so that the outgoing leadership could hand over to their successors on a high note, at least as far as the economy went, and particularly in comparison with the ailing developed economies. But the managed slowdown in domestic investment, aka deflating the property bubble and stopping the local government debt bomb from exploding, has been exacerbated by the drop in demand from China’s export markets, and especially from its largest, crisis-wracked Europe. Policymakers have had to walk a fine line between stimulating the economy sufficiently to prevent growth slipping irrecoverably below the official target and reigniting the inflation they struggled so long to bring down. At the same time, they had to avoid inadvertently lighting any fuses close to the banks’ loan books.

Yet Wen is all public cheer: “Exports have gradually recovered, consumption has grown steadily, price inflation has clearly receded, the job market has been very good,” he said in a statement published just ahead of the announcement of the third-quarter GDP number. There are monthly numbers to back him up. Exports rose 9.9% year-on-year in September, while inflation dipped to 1.9%, well down from last year’s peak of 6.5%. Retail sales were up 14.2%. This Bystander is always wary that one month’s number is no guarantee of the performance of the next one, though we don’t doubt that the 7.5% growth target for the year will be met, by hook or by crook. But Wen looks likely to over-deliver by as little as it is now clear he under-promised.

Wen also pointed out in his statement that the government “had taken new steps towards structural transformation.” As to whether he has pushed the economy fast enough down the road to rebalancing and far enough so his successors won’t turn back, we’ll leave for another day.

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China’s Slow Growth Finds Its Trough

How much stock should we put in the talking up of the economy by leading Chinese officials? Given that they have little control over the biggest short-term driver of the economy, external demand, that they are running out of time for monetary policy, such as it is, to work before the imminent leadership transition, and that reverting to the old standby of infrastructure spending risks undoing both the hard-won cooling of the property market and the long-term rebalancing of the economy, the answer is probably not much.

Corporate profit reports probably tell a truer story. It is not a comforting tale. Take these two bellwethers:

  • Cosco, operator of the world’s largest bulk cargo fleet, this week posted a loss for the six consecutive quarter and said the outlook for its industry remained bleak as a result of a gut in shipping capacity; i.e. more carrying space of inbound cargoes of raw materials and outbound ones of exports than there is demand for; and
  • Baoshan Iron and Steel, the country’s largest listed steelmaker, expects the third quarter to be “the most difficult” of the year, even though it expects to stay in the black just about.

The economy might be getting close to the end of its slowdown in growth, but it looks as if it is going to be bumping along the bottom for some months yet, regardless of the political imperatives to hand over an economy delivering the sorts of growth rates that justify the Party’s legitimacy to rule. But stimulate now with infrastructure spending and that  risks setting back the long-term changes to the economy that the Party will need to pull off if that legitimacy to rule is to outlive the next generation of leaders.

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A Stimulus By Any Other Name

When is stimulus spending not a stimulus package? When it is previously planned projects just being brought forward, apparently. State media are reporting that Beijing is saying that it is not going to stimulate the economy in the way it did after the 2008 financial crisis (via Bloomberg). That pumped 4 trillion yuan ($600 billion) in to China’s economy, an steroid-like injection of credit whose side-effects are still being felt in persistent inflation, ailing bank debt and excess industrial capacity.

With the economy again slowing, the temptation is to fall back on tried and trusted methods of state capitalism, and the devil, again, take the consequences. Up to point. Latter this year a new generation of leaders will be ushered in who will have to establish their political legitimacy and sustain the Party’s legitimacy through making all Chinese better off. A delicate balance between a quick fix and sustainable growth will have to be found that still promotes the long-term rebalancing of the economy.

So all praise to five-year plans. The National Development and Reform Commission, the agency that oversees national planning and green-lights individual projects lower down the development food chain, has the capacity to advance 1 trillion-2 trillion yuan-worth of infrastructure projects. It has already approved nearly 900 projects in the first four months of this year, twice the number in the corresponding period of last year. If anything, the pace of new approvals is gathering.

The constraint on policymakers is anunwillingness to repeat 2008s reliance on bank lending to local authorities to finance the stimulus, and a reluctance of the big-state owned banks to make their balance sheets creak any more under a further burden of new loans. Hence the talk on more private-sector financing of the proposed infrastructure investment in railways, energy, green technology, telecoms, healthcare and education.

This month, Beijing has announced a series of measures to give more scope to private capital and to expand domestic demand by subsidizing sales of consumer goods (as it did after 2008). Whether China’s private lenders will provide better judges of risk than their state-owned counterparts is yet to be seen, especially when there are national development goals breathing down their necks. Yet there is also no getting away from the fact that lending outside the state-owned banking sector is rudimentary or informal. The big state owned banks will still have to do most of the heavy lifting of a new stimulus, however it is labeled. Everyone will want to keep their load as light as possible.

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China Trims Banks’ Reserve Requirements

China’s central bank is cutting the capital reserve ratio for the country’s banks by 50 basis points, effective May 18th, a further cautious easing of monetary policy in the face of a slowing economy. The biggest banks’ capital ratios will fall to 20%.

Recent economic indicators on trade and industrial output have been weak. Although inflation is falling the bank does not yet think it is stable. Hence the choice of the third cut in the banks’ reserve ratios in six months to continue pumping liquidity into the system. New bank lending in April, at 682 billion yuan, was particularly sluggish, despite spiking the month before. February’s 50 basis points cut added an estimated 400 billion yuan ($63 billion) to the system. So cuts of this scale are modest, and intended to avoid encouraging any return to speculation in property markets. Keeping the planned measured deflation of property prices on track takes interest rate cuts off the table for now.

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China’s New GDP Growth Rate: Which One?

Chinese Premier Wen Jiabao delivered a government work report during the opening meeting of the Fifth Session of the 11th National People Congress in Beijing, March 5, 2012.The 7.5% GDP growth target for this year set by China’s prime minister, Wen Jiabao, in his speech opening the National People’s Congress (NPC), above, is an exercise in expectations management. The expectation being set is that China will continue on its steady path of moving the economy up the development ladder with its commensurate long-term slowing of growth.

It says that Beijing sees a ‘soft’ not a ‘hard’ landing for the economy in the near term, that a quick repeat of the post-2008 global financial crisis stimulus is unlikely, and that the new leadership will continue on the course the outgoing one is leaving it, as outlined in the current five-year plan. That may seem like a lot of signaling for a single number to undertake, but 7.5% GDP growth should be considered more a floor below which central government doesn’t want to see growth fall than as a number to be hit.

Growth consistently exceeds the targets Beijing sets for it. The 2006-10 five-year plan targeted an average annual growth rate of 7.5% annual growth; 9.1% in 2009 was the slowest it managed. That was also faster than the 8.0% rate Wen has announced on each opening of the NPC since 2004 until this year. The current five-year plan (2011-2015) targets a annual average target GDP growth rate of 7%, incidentally. There are central government targets, and central government targets.

Then there are provincial government targets. China’s provinces have set, on average, 11% annual growth rates for their 2011-2015 five-year plans. Not one of them is planning for less than 8% average annual growth. This Bystander is not sure who, if anyone, will be setting foot on Wen’s new floor. That is the least one should expect.


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