Five things to look out for

China Daily (Canada) - - ANALYSIS -

China’s econ­omy may re­main re­silient but over the past year it has had to face sev­eral dif­fi­cult head­winds. The fol­low­ing are five ar­eas of con­cern at the top of the govern­ment agenda.

The Chi­nese stock mar­ket made head­lines around the world over the past year.

Af­ter a year-long bull run the Shang­hai Com­pos­ite In­dex peaked at 5178 in June be­fore crash­ing. It lost 45 per­cent of its value to close at 2860 on Feb 19.

Apart from crack­ing down on il­le­gal ac­tiv­i­ties, the govern­ment will need to ad­dress the prob­lems aris­ing from the im­ma­tu­rity of the mar­ket.

Some 70 per­cent of share buy­ers are small pri­vate in­vestors. Be­fore the crash, many in­vestors be­haved like gam­blers and were bor­row­ing money through so-called mar­gin lend­ing to in­vest in the mar­ket.

Lo­cal govern­ment debt first emerged as a sig­nif­i­cant prob­lem in 2011 when China’s Na­tional Au­dit Of­fice pub­lished a re­port.

The govern­ment is de­ter­mined to over­haul the sys­tem of lo­cal govern­ment fi­nanc­ing and put an end to the im­plicit guar­an­tee that if cities get into fi­nan­cial dif­fi­culty the cen­tral govern­ment will al­ways bail them out. Part of the re­form will in­volve lo­cal gov­ern­ments is­su­ing their own bonds.

The in­ef­fi­ciency of China’s Sta­te­owned en­ter­prises is a drag on China’s eco­nomic growth prospects.

Ac­cord­ing to Gravekal Drago­nomics, a Bei­jing-based eco­nomic re­search com­pany, they had a rate of re­turn on as­sets in 2014 of 4.6 per­cent, al­most half that of the 9.1 per­cent of the pri­vate sec­tor.

The govern­ment is set to un­veil its 13th Five-Year Plan (2016-20), one of the big­gest shake-ups of the sec­tor since for­mer premier Zhu Rongji’s re­forms of the 1990s.

It par­tic­u­larly wants to tackle so­called zom­bie com­pa­nies, the worst per­form­ing of the whole sec­tor.

The value of the yuan has been one of the ma­jor global con­cerns for more than six months.

The Peo­ple’s Bank of China made an ad­just­ment to the ex­change rate mech­a­nism in Au­gust that set off sus­tained spec­u­la­tion against the yuan.

The bank’s gov­er­nor, Zhou Xiaochuan, said this month that he would stand up to in­ter­na­tional spec­u­la­tors, in­clud­ing bil­lion­aire Ge­orge Soros, try­ing to desta­bi­lize the cur­rency.

Two fac­tors that are likely to con­tinue to sup­port the yuan are China’s large cur­rent ac­count sur­plus in 2015 and rel­a­tively low lev­els of do­mes­tic in­fla­tion.

Whether China has a hous­ing bub­ble that may burst has been a worry for many years. Last year the prices of new homes rose 15.5 per­cent in Shang­hai and 8.3 per­cent in Bei­jing, but just by 1.6 per­cent in a sur­vey of 70 Chi­nese cities.

The real es­tate boom has been partly fu­eled by the huge num­ber of first-time buy­ers con­tin­u­ally com­ing into the mar­ket, but this may come to an end as the coun­try’s work­ing age pop­u­la­tion shrinks.

The govern­ment, which has con­tin­u­ally tried to con­trol the mar­ket through regulation, has re­cently eased pol­icy. On Feb 2 the fi­nan­cial au­thor­i­ties cut the down­pay­ment re­quired for first-time buy­ers from 25 to 20 per­cent. This fol­lowed the move in Oc­to­ber when it was re­duced from 30 per­cent, where it had stood since 2010, to 25 per­cent.

PRO­VIDED TO CHINA DAILY

Chi­nese stocks fell on Feb 15 as trad­ing re­sumed af­ter the week-long Spring Fes­ti­val hol­i­day.

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