Tag Archives: rebalancing

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.

Advertisements

Leave a comment

Filed under Economy, Uncategorized

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.

Leave a comment

Filed under Banking, Economy

Trade Tension And A Less Certain Outlook Cloud China’s Economy

THE INTERNATIONAL MONETARY FUND has held its growth projections for China unchanged even as it warned of growing downside risks to the global outlook.

The newly published July update to its World Economic Outlook puts its forecast GDP growth at 6.6% for this year and 6.4% for next. It cites softening world demand and regulatory and financial tightening as the reasons why.

The Fund’s forecast is in line with official figures for the second quarter released today by the the National Bureau of Statistics showing the economy growing by 6.7% year-on-year in the second quarter, the twelfth consecutive quarter of 6.7-6.9% growth.

Rebalancing, evidenced by private and public consumption contributing a record 78.5% of January-June GDP growth, continues as does excess-capacity reduction; mining sector output grew by at less than a quarter of the pace of overall industrial output.

Net export volumes shaved 0.7 of a percentage point off first-half growth as exporters and importers raced to beat the imposition of US tariffs. The effect of those are likely to be felt more severely in the second half of this year.

For its part, the IMF notes:

The recently announced and anticipated tariff increases by the United States and retaliatory measures by trading partners have increased the likelihood of escalating and sustained trade actions. These could derail the recovery and depress medium-term growth prospects, both through their direct impact on resource allocation and productivity and by raising uncertainty and taking a toll on investment.

To trade tensions, the Fund adds rising US interest rates and commodity prices, notably oil, as among the most concerning downside risks to the global economy.

The Fund’s prescription that ‘avoiding protectionist measures and finding a cooperative solution that promotes continued growth in goods and services trade remain essential to preserve the global expansion’ may find more resonance in Beijing that Washington these days, as will its call to preserve global economic integration under an open, rules-based multilateral trade system.

Leave a comment

Filed under Economy

Powering Up Rebalancing

Bar chart of electric power consumption in China by sector, Jan-May, 2018, year-on-year % increase.

ELECTRIC POWER CONSUMPTION acts as a proxy for economic activity. These sectoral figures from the National Development and Reform Commission (NDRC) for the first five months of this year give a snapshot of where the growth is strongest, and points up how the economy is rebalancing.

Leave a comment

Filed under Economy

IMF Sees China’s Economy With Momentum To Face Headwinds

IN ITS LATEST World Economic Outlook, the International Monetary Fund has left its forecast for China’s growth this year and next unchanged from January’s 6.6% and 6.4% respectively.

Both numbers are one-tenth of a percentage point higher than the Fund’s forecast in October last year. They are also in line with the most recent forecasts from the World Bank and the OECD.

Faster than expected global growth and domestic policy support has sustained the economy in the form of resurgent net exports and healthy private consumption, giving it some momentum to propel it into the challenging headwinds of America First protectionism and still-risky domestic overleverage.

Thereafter, the IMF provides a familiar refrain:

Over the medium term, the economy is projected to continue rebalancing away from investment toward private consumption and from industry to services, but nonfinancial debt is expected to continue rising as a share of GDP, and the accumulation of vulnerabilities clouds the medium-term outlook.

And its obligatory silver lining:

Tighter regulation of nonbank intermediation in China, where nonfinancial corporate sector debt is still rising, is a welcome start of a needed policy response to contain the accumulation of vulnerabilities.

But it also highlights a missed opportunity:

Fiscal policy has played a vital part in shoring up short-term growth at the expense of eroding valuable policy space. Gradual consolidation, together with a shift of spending back onto the budget and away from off-budget channels, would help improve sustainability.

The Fund’s accompanying Global Financial Stability Report goes into greater depth about the elevated risks posed by what it says is the large-scale, tight and opaque linking of the banking system to the shadow banking sector (see diagram below) through its exposure to off-balance-sheet investment vehicles largely funded through the issuance of some 75 trillion yuan ($12 trillion) of investment products.

One-third of those by value are directly managed by the banks, who are seen as implicitly guaranteeing the products. A key challenge for authorities will be phasing out those implicit guarantees, which will require banks to improve their liquidity and capital buffers as there are large maturity mismatches between the products’ assets and liabilities.

Diagram of linkages within China's financial system. Credit: IMF Global Stability Report, April 2018

Leave a comment

Filed under Economy

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.

Leave a comment

Filed under Economy, Trade

Steady GDP Growth Target Reflects Measured Derisking

Chinese Premier Li Keqiang delivers his work report at the first session of the 13th National People's Congress in the Great Hall of the People in Beijing, March 5, 2018. Photo credit: Xinhua.

THE OFFICIAL GDP growth target for 2018 is ‘around 6.5%’, the same as last year, when the outcome was a forecast 6.9%, Prime Minister Li Keqiang (above) told the National Peoples Congress in his annual work report. However, the aspirational text from last year on the upside of the target has been dropped for this.

More significantly, the deficit target has been cut for the first time since 2012, to 2.6% of GDP from 3.0%, and monetary policy is to remain neutral, suggesting a tightening of the fiscal screw as authorities’ preferred way to de-risk the financial system.

If the 6.5% growth target is hit, China will be comfortably on course to achieve the goal set in 2010 of doubling per capita GDP by 2020 and thus making it a ‘moderately well-off society’. Growth needs to average only 6.3% between 2018 and 2020 for the target to be achieved.

Less certain is the extent to which quality of growth will replace quantity, as advertised at October’s quinquennial Party Congress. Li repeated the intention to reduce debt-fuelled investment, pollution, poverty and industrial overcapacity, in line with the Party line, but a 6.5% growth target would imply more economic stimulus or less fiscal drag than might otherwise be expected under the managed long-term slowdown and rebalancing of the economy.

That continues incrementally. He Lifeng, head of the National Development and Reform Commission, said on the sidelines of the NPC that consumption is likely to contribute around 60% to economic growth in 2018, up from 58.8% last year and barely 56% five years ago.

He also identified plate glass, cement and electrolytic aluminium as among the next round of target industries for capacity cuts.

The new GDP growth target also implies that the pace of structural financial reform will remain cautious, as it has been for some time. Deleveraging via cracking down on corporations, as happened to Anbang and more recently CEFC China Energy, will continue to be a way of removing excess financial risk from the system while serving the twin goal of aligning private sector foreign direct investment with the national interest.

Similarly, on the debt issue, Finance Minister Xiao Jie indicates that administrative action will be taken against irregularities in local government financing. Local governments account for 55% of the combined debt of central and local governments of  29.95 trillion yuan ($4.75 trillion) at the end of last year.

While some progress has been made on both reducing local government debt levels and structural reforms to local government financing, local governments remain overly dependent on land sales, with the concomitant risk of abuse.

However, a trade war, depending on its severity and duration, might make all that moot.

Leave a comment

Filed under Economy