Tag Archives: rebalancing

China’s First-Quarter Growth Lays Base For Hitting 2019’s Target

FIRST-QUARTER GROWTH came in slightly better than expected at 6.4% (consensus estimates were for 6.3%), and unchanged from the final quarter of 2018, confirming that the targeted stimulus applied since the second half of last year is taking effect.

The combination of fiscal and monetary measures helped boost industrial production in March by 5% year-on-year and retail sales by 8.7%. Fixed asset investment increased by 6.3%.

Beijing is targeting growth for the year at between 6% and 6.5%.

The challenges remain balancing growth with deleveraging and the prospect of a slowing global economy. The outcome of the trade talks with the United States is the wildcard.

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IMF Sees No Reasons For China’s Economy Not To Stop Slowing

A chart showing China's slowing GDP growth trajectory, 2010-2024. Source: IMF, Bystander Media

The IMF’s CHANGE in its forecasts for China’s growth this year and next go in opposite directions to those for the global economy as a whole.

In the new edition of its World Economic Outlook, The Fund projects 6.3% GDP growth this year and 6.1% in 2020. That is a one-tenth of a percentage point increase and reduction respectively on the Fund’s forecast in January, which in turn was unchanged from its forecast last October. However, for the world economy, it has cut its projections for this year but sees faster expansion in 2020.

The upgrade to the China forecast for this year is in large part technical. The Fund has dropped the assumption made in its previous forecast that the US tariff rate on $200-billion worth of trade would rise as threatened by the Trump administration to 25% from 10%.

China’s growth had started slowing in the second half of 2018 as a result of the measures to deleverage and rein in shadow banking, and the increase in trade tensions with the United States. At the same time, the consequent slower domestic investment was accompanied by softening consumption, particularly for cars, whose sales declined with the ending of incentive programs. The economy expanded by 6.8% in the first half of 2018, but by only 6.0% in the second.

For this year, the Fund expects economic conditions to improve as stimulus kicks in. Nonetheless, the external environment will be challenging: the advanced economies are slowing down; trade tensions with the United States are likely to persist regardless of any deal being struck in the near future, and there is likely to be a gradual tightening of financial conditions consistent with some further removal of monetary policy accommodation by the US Federal Reserve.

Even assuming no further increase in tariffs and a continuation of fiscal stimulus by Beijing, China’s economic growth is projected to slow this year and into next as the underlying forces that slowed growth in the second half of last year persist.

Longer term, the Fund sees a gradual slowing of the economy to 5.5% annual GDP growth by 2024. This is assuming the successful continuation of rebalancing towards a private-consumption and services-based economy and of the authorities’ actions to slow the accumulation of debt and mitigate its associated vulnerabilities.

This Bystander has less confidence in the second assumption than in the first. Cuts to personal income tax and value-added tax for small and medium enterprises should help stimulate domestic consumption. However, authorities also eased back on deleveraging and injected liquidity through
cuts in bank reserve requirements.

Any excessive stimulus to support near-term growth through a loosening of credit standards or a resurgence of shadow banking activity and off-budget infrastructure spending would heighten financial vulnerabilities — another reason that President Xi Jinping may be anxious to secure a deal with US President Donald Trump sooner rather than later.

If no deal is reached with the United States, that will cast a dark shadow over the medium-term outlook.

The Fund acknowledges that some centrally financed on-budget fiscal expansion in 2019 may be appropriate to avoid a sharp near-term growth slowdown that could derail the overarching reform agenda. However, it says this should avoid large-scale infrastructure stimulus and instead “emphasize targeted transfers to low-income households so as to lower poverty and inequality”.

It also lays out its familiar shopping lists of structural reforms:

Reducing leverage in the economy will require:
⁃ continued scaling back of widespread implicit guarantees on debt;
⁃ early recognition and disposal of distressed assets; and
⁃ fostering more market-based credit allocation that better aligns risk-adjusted returns with borrowing costs.
Continued rebalancing will require:
⁃ a more progressive tax code;
⁃ higher spending on health, education, and social transfers; and
⁃ reduced barriers to labour mobility.
Enhancing productivity growth will require:
⁃ reducing the footprint of state-owned enterprises; and
⁃ further lowering barriers to entry in certain sectors, such as telecommunications and banking.

As an endnote, the World Economic Outlook devotes a whole chapter to the link between bilateral trade tariffs and trade imbalances, and questions whether bilateral trade imbalances can (or should) be addressed using bilateral trade measures. Its conclusion is a rebuff to US President Donald Trump’s stated intention of using tariffs to cut the US trade deficit with China. It concludes that:

Targeting bilateral trade balances will likely only lead to trade diversion, with limited impact on country-level balances. The findings of this chapter help explain why, despite the tariff measures, the US trade deficit is the largest it has been since 2008. The chapter also establishes that the negative impact of tariffs on output is significantly higher today than in 1995 owing to the bigger role of global supply chains in world trade.

The paradox is that Trump’s tariffs will not achieve their stated aim of achieving balanced trade and have imposed a cost on US manufacturers and farmers, bu have got Beijing to the table to negotiate over structural reforms to its development model that it has never been prepared to talk about before.

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US-China Trade Deal: The Devil Is In The Enforcement

BEIJING AND WASHINGTON are both talking up progress by their trade negotiators as they each look to come up with a formula for avoiding the damaging consequences of the imposition of tariffs on US-China trade that will otherwise occur at the end of next week.

News that the Chinese team led by Vice-Premier Liu He will be extending this week’s two-days of talks in Washington can be read either way: that agreement is nearing and just needs a final push; or that it remains elusively far away.

On one superficial level, this Bystander believes, it is the former, but deeper down it remains the latter.

What is likely to be agreed by March 1, the deadline to conclude an agreement set by Presidents Xi Jinping and Donald Trump over dinner at last autumn’s G20 meeting in Buenos Aires, is a framework for further talks with six tracks: currency, cyber theft and forced technology transfers, services, agriculture, intellectual property and non-tariff barriers.

Each track would have binding objectives in terms of structural economic change in China. In addition, there would be an agreement to cut China’s bilateral merchandise trade surplus with a number of immediate big-ticket buys of US goods and produce, notably soybeans, which had been a $12 billion a year sale for US farmers before the tariff tit-for-tat started. Energy and industrial goods will also be on China’s shopping list.

The sections in the agreement for the six tracks would have been called memoranda of understanding in the old diplomatic language. Donald Trump does not like the term, and slapped down the US Trade Representative Robert Lighthizer for using it. Trump is a ‘dealmaker’, not a memorandum of understanding sort of guy; and to be fair to the president, touting that he has secured the ‘greatest memorandum of understanding  — ever’ just does not have the same ring as being able to boast of the making the ‘greatest deal — ever’.

Trump’s intent is to tie the big red bow on a deal at a meeting with Xi sometime after his summit with North Korean leader Kim Jong Un in Hanoi on Wednesday.

The six areas are all ones in which Beijing will be prepared to agree binding objectives. They are aligned with the structural changes it anyway needs to make to rebalance the economy. The sticking points are how far and how fast Beijing is prepared to go at this point, and, crucially, what monitoring and enforcement mechanisms it is prepared to accept.

Each of the six tracks has obstacles of differing degrees of difficulty to overcome. The currency one has already reportedly been settled. It was probably the easiest to tackle, given that China has a managed float for its currency in place and the yuan-dollar rate provides a clear and transparent measure, even if there is plenty of scope for argument over what constitutes a ‘fair-value’ rate.

On the other five, finding the right language that meets the Trump administration’s tough demands for structural change yet gives Beijing the room to soft-peddle has been proving as difficult as would have been expected.

The most progress has been made on intellectual property rights and improved market access; the least, on the role and practices of state-owned enterprises, subsidies, forced technology transfers from US companies operating in China and, thorniest of all, cyber theft of US trade secrets.

That last one goes to the heart of the issues between the two sides. If China is to succeed in ‘catching up’ with the US economy industrially and rebalancing its economy so the next phase of growth is driven by high-value manufacturing and services based on the next generation of industries, then it will need to acquire the technology to do so by fair means or foul and nurture the national champions to develop and exploit it.

Those priorities will not be given up lightly.

For Trump, a big political win on China, one of his core issues in the 2016 presidential election campaign, is essential going into his 2020 re-election bid. With the newly energised Democrats snapping at his heels, he needs headline concessions that sound grand and victorious to his electoral base, especially in the tightly contested states of the (formerly) industrial MidWest.

Xi, too, needs to demonstrate domestically that he has got the measure of Trump and that he is not yielding any sovereignty to Washington over the reform process. Any sign of the latter will be seized upon by his political critics.

So for both men, perceptions at home are critical. That is what an agreement at or around the end of the month will deliver above all.

Negotiating the details of implementation of what is agreed will take far longer. China will drag its feet on that to the extent that it can get away it until if and when US attention switches elsewhere whether under the current president or his eventual successor. Even a two-term Trump would be out of office ahead of the delivery year for Made in China 2025.

For that reason, this Bystander will be reading closely the details of the enforcement and monitoring procedures that are agreed.

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China’s Growth Continues To Slow As Expected

THE QUESTION ABOUT the economy is not whether it is slowing, which it has been for many years as authorities manage the rebalancing of the economy, but whether the pace of the deceleration has suddenly picked up to a point where it threatens domestic stability.

The latest official figures show that last year, the economy expanded by 6.6% year-on-year, down from 6.8% in 2017 and its slowest since 1990. It grew by only 6.4% in the three months to December as tariffs, uneven domestic demand and a slowing global economy started to bite.

This was all much as expected and had already been reflected in contractions in December’s trade data and factory activity gauges. It does, though, add urgency to Beijing forestalling the imposition of further US tariffs at the end of the ‘trade truce’ next month.

The 2018 annual growth figure is in line with the official target, again, and again will raise questions about the accuracy of the GDP number. Some unofficial estimates put growth at two-thirds the level of the official figure.

However, wherever the exact number lies — and in this Bystander’s view, it is closer rather than farther from to the official number — the direction of travel is clear.  The new official target for this year, believed to have been agreed by the leadership and likely to be announced in March, is likely to reflect that — somewhere just north of 6%.

The policy response is a limited stimulus shaped in many respects by the need to continue deleveraging the economy. There will not be old-school large-scale infrastructure investment. Instead, Banks’ capital reserve requirements are being cut, as are some 2 trillion yuan ($290 billion) worth of taxes and import duties, notably value-added tax and local authorities are being given scope to issue a similar volume of bonds to finance construction spending without adding to tomorrow’s potential bad bank debt.

While this is a modest version of a previously used approach, the difference is that banks are being encouraged to lend to the private sector rather than being instructed to lend more to state-owned enterprises. Over the next three years, banks are expected to increase their lending to private companies to about one-half of total loans from the current one-quarter, in the hope that will prevent politically unacceptable job losses.

The gamble with this strategy is that the availability of funds to borrow does not mean that companies will take out loans, as was seen with quantitative easing in Western economies after the great financial crisis of 2018. Thus job creation and underemployment will be similarly slow, which will become the political stability risk for authorities to manage.

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Short-Term Stimulus Trumps Long-Term Risk

THERE IS MUCH to digest in the official reports of the annual Central Economic Work Conference just concluded in Beijing.

In short, every available policy tool will be thrown at stabilising slowing growth in the short-term while attempting to keep a clear eye on the long term goal of rebalancing and deleveraging the economy and establishing China’s greater role in global economic governance, the unstated part being that the successful execution of the long-term plan is what will ensure the Party’s continued monopoly on power.

For now, keeping the economic ship stable in turbulent waters in 2019 will demand bigger tax cuts, no tightening of monetary policy and easing as needed, particularly to keep liquidity flowing to small and medium-sized enterprises in the private sector, and a significant expansion of special-purpose local government bond issuance to pay for the old stimulus standby, more infrastructure investment.

This all adds up, if not to a full-blown stimulus package then at least a considerable expansion of this year’s targeted measures.

The downside is that it will slow the long-term structural reforms needed to move the economy up the development ladder and to defuse the country’s underlying debt bomb. The trade tensions with the United States are lengthening the fuse, and that may do more damage to the economy than tariffs themselves.

Deleveraging the economy while simultaneously stimulating it is a difficult balancing act, and the more so in a global economic environment that is more unpredictable and unfavourable to Beijing that any recent leadership has experienced.

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Latest China GDP Figures Show Stable But Challenged Growth

Screen Shot 2018-10-20 at 10.44.23 AM

IF THERE IS a scintilla of concern for authorities in the third-quarter GDP growth figure, covering July-September, it is that the tariffs imposed by the United States have not had much time to have a material impact.

At 6.5% year-on-year, the third-quarter number represents the slowest quarterly growth rate since the first quarter of 2009 in the immediate aftermath of the 2008 global financial crisis. However, it is still in line with the official growth target for the year. For the first nine months, GDP grew at an above-target 6.7%, according to the National Bureau of Statistics, which generally portrays the economy as “running within reasonable range in the first three quarters, and [continuing] to stay stable with good growing momentum”.

However, as the economists like to say, all the risks are on the downside: Trump’s tariffs; the ticking debt time bomb; and the pains of rebalancing.

In particular, with the Trump administration ramping up its tariffs in the current quarter and no resolution to the trade frictions between the two countries in sight, further policy support for the economy is going to be needed. However, policymakers’ scope to stimulate the economy is limited by high debt levels, in part taken on to finance the infrastructure investment boom that was the stimulative response to the 2008 financial crisis.

Giving banks more freedom to grow their loan books, trusting their credit judgements are better — or less politically swayed — than they have been in the past, will be preferred to increasing direct government spending. There will some of that, though, too, if growth is seen as slowing uncomfortably fast once the current round of US tariffs takes effect, or is followed by another.

Investors are less than convinced. Hence the raft of bullish statements from President Xi Jinping’s top economic adviser and the heads of the securities regulator, the combined insurance and banking watchdog and the central bank urging investors to stay calm as the main stock market index neared a four-year low.

However, the important words are yet to be spoken. Those will exchanged between Presidents Xi and Donald Trump when they meet at the G20 leaders’ summit in Buenos Aires at the end of November and may give an indication of which direction the trade disputes between the two countries are headed in.

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Even The Ever-Optimistic IMF Frets Over China-US Trade Tensions

THE INTERNATIONAL MONETARY FUND has cut its forecast of China’s 2019 GDP growth by 0.2 percentage point to 6.2% because of the expected impact of tariffs imposed as a result of its trade dispute with the United States. In its newly published World Economic Outlook, the Fund also projects 6.6% growth for this year, down from 6.9% in 2017 as the policy measures to slow credit growth and deleverage the economy take effect.

However, the IMF expects China to apply domestic stabilisation measures that will boost growth in 2019 by 0.5 percentage points to offset the impact of the tariffs, which the Fund estimates to cut growth by 0.7 percentage points potentially.

The Fund’s baseline forecast takes account of tariffs announced by mid-September. Maurice Obstfeld, the director of the IMF’s Research Department, says he is less optimistic about a resolution to the trade dispute with the United States than he was six months ago. In one scenario modelled by the Fund, an escalation of trade restrictions could cut 1.6% of China’s GDP in 2019.

Obstfeld, who retires soon, also took what by the IMF’s diplomatic standards was a hugely political swing at ‘America First’ unilateralism. He concluded what will be his final forward to the Outook with this paragraph.

Multilateralism must evolve so that every country views it to be in its self-interest, even in a multipolar world. But that will require domestic [Obstfeld’s italics] political support for an internationally collaborative approach. Inclusive policies that ensure a broad sharing of the gains from economic growth are not only desirable in their own right; they can also help convince citizens that international cooperation works for them. I am proud that during my tenure, the IMF has increasingly championed such policies while supporting multilateral solutions to global challenges. Without more inclusive policies, multilateralism cannot survive. And without multilateralism, the world will be a poorer and more dangerous place.

Dealing with one aspect of ‘America First’, the US-China trade dispute, the People’s Bank of China has again just eased monetary policy, reversing its recent stance to rein in credit growth and address financial risks though deleverage.

The Fund says applying domestic stimulus will be at the long-term cost of delaying tackling China’s internal financial imbalances. It has advocated for some time that China should de-emphasise the quantity of growth and think more about the quality of growth and the economy’s resilience to financial instability — the shadow banking sector and over-leveraging in local government financing being two of the most glaring point of vulnerability.

“It will be important, despite growth headwinds from slower credit growth and trade barriers, to maintain the focus on deleveraging and continue regulatory and supervisory tightening, greater recognition of bad assets, and more market-based credit allocation to improve resilience and boost medium-term growth prospects,” the Fund says.

In its Financial Stability Report, issued the day after the World Economic Outlook, the IMF says:

In China, financial conditions have remained broadly stable, with an easing in monetary policy largely offsetting the impact of external pressures. China’s equity markets have weakened on rising trade tensions. Tighter liquidity resulting from earlier regulatory efforts to de-risk and deleverage the financial system has led to pockets of stress in corporate bond markets, which prompted Chinese authorities to ease monetary policy. The central bank injected liquidity via cuts to the required reserve ratio and through lending facilities. The exchange rate weakened further, down 7 percent against the U.S. dollar (and down 5 percent compared with a basket of 24 currencies) since mid-June, prompting authorities to reintroduce a 20 percent reserve requirement for foreign exchange forwards.

The trade-off between growth and stability is a difficult one for policymakers in any country. In China, that will always lean towards stability, which will likely mean a more accommodative macro policy stance and only fine-tuning to deleverage.

Hence the IMF repeats its mantra:

Despite a growing emphasis in China on the quality rather than the speed of growth, tensions persist between stated development goals and intentions to reduce leverage and allow market forces to play a larger role in the economy.

An overarching priority is to continue with reforms, even if the economy slows down, and to avoid a return to credit- and investment-driven stimulus. Key elements of the reform agenda should include:

  • strengthening financial regulation and tightening macroprudential settings to rein in the rapid increase in household debt;
  • deepening fiscal structural reforms to foster rebalancing (making the personal income tax more progressive and increasing spending on health, education, and social transfers); tackling income inequality by removing barriers to labor mobility and strengthening fiscal transfers across regions; and
  • more decisively reforming state-owned enterprises; and fostering further market liberalization, particularly in services.

Addressing the distortions that affect trade and cross-border flows is also needed.

All of which, as ever, is more about domestic political priorities than economic policymaking.

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