As a year of mas­sive po­lit­i­cal shocks ends, and one whose out­lines could not be more in doubt is just be­gin­ning

China Daily (Canada) - - ANAL­Y­SIS - By AN­DREW MOODY


The world econ­omy is likely to face many chal­lenges in the new year, not least an ex­tra­or­di­nary level of un­cer­tainty. United States Pres­i­dent-elect Don­ald Trump takes the oath of of­fice on Jan 20 and has promised pro­tec­tion­ist mea­sures against China and a pro­gram of fis­cal ex­pan­sion.

Bri­tain’s ne­go­ti­a­tions on quit­ting the Eu­ro­pean Union are likely to be­gin in the spring around the time of French pres­i­den­tial elec­tions, both of which could have ma­jor im­pli­ca­tions for the fu­ture of the EU.

So where does this leave China? The world’s sec­ond-largest econ­omy en­joyed a rel­a­tively be­nign 2016 with growth sta­bi­liz­ing at 6.7 per­cent in the first three quar­ters.

Ex­ter­nal events — not least the pos­si­ble US tar­iffs on Chi­nese im­ports — could partly de­rail its eco­nomic progress.

The Chi­nese govern­ment made clear its own eco­nomic agenda at the Cen­tral Eco­nomic Work Con­fer­ence, at­tended by se­nior lead­ers in Bei­jing, in De­cem­ber.

It set out six di­rec­tions of pol­icy: main­tain­ing medium-to-high “new nor­mal growth”; sta­bil­ity; sup­ply­side re­form; a new de­vel­op­ment con­cept fo­cus­ing on in­no­va­tion and the de­vel­op­ment of green tech­nolo­gies; im­prov­ing qual­ity and ef­fi­ciency; and com­bin­ing poli­cies at both the macro and mi­cro level that work for the good of the over­all econ­omy.

Vin­cent Chan, man­ag­ing di­rec­tor and head of China re­search for Credit Suisse, who is based in Hong Kong, says that for the first three months of the year China will be try­ing to work out what the new pol­icy agenda will be in the US.

“This is the ma­jor un­cer­tainty. You have a si­t­u­a­tion where not just China but no­body else un­der­stands what this is go­ing to be. Pol­i­tics is go­ing to be the big is­sue, which will in­flu­ence the eco­nom­ics.”

Chan, how­ever, be­lieves China’s growth, as­sum­ing no ma­jor ex­ter­nal shocks, should in­crease to 6.8 per­cent in 2017, 0.1 per­cent­age up from the level achieved so far last year.

It will be notched up­ward by ex­port growth of 8 per­cent, com­pared with the 6 per­cent con­trac­tion in goods and ser­vices sold overseas in 2016, he says.

“The cur­rent high lev­els of in­fra­struc­ture in­vest­ment at two and a half times the level of nom­i­nal GDP growth will keep the econ­omy steady at 6.5 per­cent, and ex­ports will give it an ad­di­tional push this year.”

Dun­can Innes-Ker, re­gional di­rec­tor, Asia, of the Economist In­tel­li­gence Unit, based in Lon­don, says the Chi­nese econ­omy will strug­gle to main­tain its mo­men­tum in 2017. He be­lieves growth will slow to 6.2 per­cent.

“What has driven growth in 2016, par­tic­u­larly in the sec­ond half, has been the con­struc­tion sec­tor, which has been re­lated to the strength of the hous­ing mar­ket,” he says. (Prop­erty prices in the ma­jor cities have risen 30 per­cent over the year).

Innes-Ker be­lieves the cur­rent credit growth of 20 per­cent a year, fu­el­ing debt, is be­com­ing un­sus­tain­able.

He though thinks the govern­ment will wait un­til 2018 to tackle that, re­sult­ing in a hard land­ing, with growth slump­ing to 4 per­cent but re­cov­er­ing to 5 per­cent in 2019.

“If it doesn’t, there would be se­vere strains in the fi­nan­cial sec­tor that would be very dam­ag­ing in the longer term,” he says.

Louis Kuijs, head of Asia for the global ad­vi­sory firm Ox­ford Eco­nom­ics, who is based in Hong Kong, thinks there will be no ma­jor change in eco­nomic pol­icy un­til af­ter the 19th Na­tional Congress of the Com­mu­nist Party of China in Novem­ber, when a new Stand­ing Com­mit­tee will be elected.

He be­lieves pol­i­cy­mak­ers will man­age to achieve 6.3 per­cent growth.

“Growth will con­tinue to rely on pol­icy sup­port in the form of fis­cal ex­pan­sion and, espe­cially, gen­er­ous credit growth. We do not ex­pect pol­i­cy­mak­ers to sig­nif­i­cantly slow the pace of credit ex­pan­sion be­fore the party meet­ing.”

Ed­ward Tse, founder and chief ex­ec­u­tive of­fi­cer of the man­age­ment con­sul­tancy Gao Feng Ad­vi­sory, says he is not par­tic­u­larly wor­ried about debt in the Chi­nese econ­omy.

“It has never been proven what is a dan­ger­ous level of debt. I don’t think right now China is at any ma­jor risk.”

Tse, also au­thor of The China Strat­egy and who is con­fi­dent the econ­omy will en­joy growth of be­tween 6 and 7 per­cent in 2017, be­lieves de­bates about in­vest­ment in in­fra­struc­ture be­com­ing in­creas­ingly in­ef­fi­cient in terms of re­turn miss the point.

“I do not be­lieve they take into ac­count all the mul­ti­plier ef­fects of hav­ing a highly ef­fi­cient trans­port sys­tem. They might say a high­speed rail line from point A to B is not worth it, but they fail to see the ben­e­fit from the point of view of the whole rail grid be­ing im­proved by the ad­di­tional line,” he says.

Chan at Credit Suisse says the main worry about China is not the in­dus­trial econ­omy but the fi­nan­cial sys­tem, as ev­i­denced by the

It has never been proven what is a dan­ger­ous level of debt. I don’t think right now China is at any ma­jor risk.”

weak­en­ing of the yuan. In the year to Novem­ber it had de­pre­ci­ated by a trade-weighted 8 per­cent.

“It is a mea­sure to some ex­tent of how im­por­tant the Chi­nese yuan has be­come as a global cur­rency,” Chan says. “I think it is less im­por­tant than the US dol­lar or the euro, but now more sig­nif­i­cant than ei­ther the Ja­panese yen or the British pound.

“You can see this with mar­ket be­hav­ior over the past two months re­spond­ing to the yen fall­ing by 15 to 20 per­cent. There has been vir­tu­ally no re­ac­tion. When the Chi­nese yuan falls by just 2 per­cent every­body seems to worry.”

The cur­rency de­pre­ci­a­tion re­flects con­cerns over ris­ing debt in the sys­tem, shadow bank­ing and bond mar­ket weak­nesses, he says.

“It goes fur­ther than just be­ing a mat­ter of the ex­change rate it­self.”

One of the ma­jor con­cerns is whether Trump is se­ri­ous about im­pos­ing trade bar­ri­ers on Chi­nese goods, such as the 45 per­cent tar­iff on im­ports pro­posed dur­ing the elec­tion cam­paign.

On Dec 22 the pres­i­dent-elect sent an omi­nous sig­nal by ap­point­ing Peter Navarro to the new post of di­rec­tor of trade and in­dus­trial pol­icy. Navarro, a pro­fes­sor at the Univer­sity of Cal­i­for­nia, Irvine, has been highly crit­i­cal of China.

Wang Huiyao, pres­i­dent and founder of the Cen­ter for China and Glob­al­iza­tion in Bei­jing, China’s largest in­de­pen­dent think tank, be­lieves the rhetoric seems to ig­nore the re­al­ity of a glob­al­ized world that re­lies on very so­phis­ti­cated sup­ply chains.

“This means that the iPhone is as­sem­bled in China and prod­ucts sold by Walmart in the US are sourced from China. If we sud­denly move away from this then con­sumers will be hurt — the very con­sumers who now seem set against glob­al­iza­tion by vot­ing for Trump and Brexit.

“We still live in a glob­al­ized world, and that is a fact. We sink or swim to­gether.”

Tse, who is ac­knowl­edged as one of China’s lead­ing busi­ness ex­perts, be­lieves that in­stead of putting up bar­ri­ers, the US could re­ceive a jobs boost from Chi­nese man­u­fac­tur­ing in­vest­ment in the rust belt.

The Chi­nese au­to­mo­tive glass maker Fuyao opened a glass fab­ri­ca­tion plant, which will be the world’s largest, in Mo­raine, Ohio, in Oc­to­ber and cre­ated thou­sands of jobs.

“There is no rea­son why a Trump govern­ment should not wel­come this kind of in­vest­ment be­cause it is not tak­ing jobs from Amer­ica but adding them,” Tse says.

How­ever, he says, he is pick­ing up sen­ti­ment from busi­nesses that be­cause of the un­cer­tainty they may pri­or­i­tize in­vest­ment in lo­ca­tions on China’s Belt and Road Ini­tia­tive and not in the US or Europe.


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