China Daily (USA) - - ANALYSIS - Con­tact the writer at an­drew­moody@chi­nadaily. com.cn

Fears about the Chi­nese econ­omy are no longer cen­ter stage. In Jan­uary, slow­ing China growth was seen as one of three ma­jor global eco­nomic risks along with ris­ing United States in­ter­est rates and Bri­tain’s EU ref­er­en­dum vote.

Af­ter the mid­point of the year, how­ever, China is prov­ing the most re­silient with GDP ex­pand­ing 6.7 per­cent — within the range of the gov­ern­ment’s 6.5-7 per­cent tar­get — in the sec­ond-quar­ter fig­ures an­nounced on July 15.

The new data led the In­ter­na­tional Mon­e­tary Fund to in­crease its 2016 fore­cast for Chi­nese growth by 0.1 per­cent­age point to 6.6 per­cent while at the same time re­vis­ing down its es­ti­mate for global growth by the same mar­gin to 3.1 per­cent.

Chris­tine La­garde, manag­ing di­rec­tor of the IMF, said in Bei­jing on July 23 that she was con­fi­dent of the di­rec­tion of the China econ­omy.

She was at­tend­ing the so­called Six Plus One meet­ing, which in­cluded rep­re­sen­ta­tives of the World Bank, the OECD and the World Trade Or­ga­ni­za­tion, the G20 fi­nan­cial sta­bil­ity board and Chi­nese Premier Li Ke­qiang as well as the IMF.

“First of all, we have wit­nessed the de­ter­mined and de­ci­sive im­ple­men­ta­tion of re­forms; and sec­ond, there was also sup­port given to the econ­omy in or­der to en­cour­age growth to go forward,” she said.

“On the lat­ter point, it did not take the form of vast fis­cal stim­u­lus but sim­ply some solid and steady sup­port in or­der to make sure that growth was in­deed sus­tain­able,” she added.

With the re­al­ity of Brexit post­pon­ing any im­me­di­ate prospect of the Fed­eral Re­serve Bank rais­ing rates, global risks now cen­ter on two main ar­eas: the sta­bil­ity of the Euro­pean Union in the wake of the UK vote and the US pres­i­den­tial elec­tion in Novem­ber.

Some won­der whether China might also be chang­ing the terms of the eco­nomic de­bate that has dom­i­nated since the fi­nan­cial cri­sis with much of its growth driven by an active ex­pan­sion­ist mon­e­tary and fis­cal pol­icy, while many of the West­ern economies are mired in ane­mic growth while fol­low­ing debt-re­duc­ing aus­ter­ity poli­cies. There were fur­ther in­di­ca­tions the Chi­nese econ­omy had sta­bi­lized on Aug 1 with the pub­li­ca­tion of China’s pur­chas­ing man­agers in­dex for man­u­fac­tur­ing.

De­spite the head­winds of sum­mer flood­ing in China and ca­pac­ity re­duc­tion of some tra­di­tional en­ter­prises, it con­tracted to just 49.9 in July.

The Caixin China Man­u­fac­tur­ing PMI, pub­lished on the same day, ex­panded to 50.6, well ahead of ex­pec­ta­tions of the Bloomberg panel of ex­perts of 48.8.

Ge­orge Mag­nus, se­nior in­de­pen­dent economist at Swiss bank UBS in Lon­don, said the mar­ket con­cerns about the Chi­nese econ­omy have cer­tainly re­ceded since the be­gin­ning of the year.

“What­ever peo­ple thought was go­ing to hap­pen to China ear­lier this year has not hap­pened. The econ­omy and Chi­nese fi­nan­cial mar­kets have not been event-free but they have been rel­a­tively sta­ble thanks to more ef­fi­cient pol­icy-mak­ing in the cur­rency mar­ket, and also to fis­cal and mon­e­tary ex­pan­sion that has kept the econ­omy from slow­ing fur­ther,” he said.

“The top billing in­stead has been taken by the merry-gor­ound of Fed ex­pec­ta­tions and Brexit.”

Dun­can Innes Ker, Asia re­gional di­rec­tor for The Economist In­tel­li­gence Unit in Lon­don, agrees some of the fears have abated.

“The sec­ond-quar­ter data was rel­a­tively sta­ble and has al­lowed China to slip down the ranks of global con­cerns,” he said. “When you look at the po­lit­i­cal and eco­nomic is­sues out there you have Brexit and the Trump ver­sus Clin­ton con­test, which is sap­ping en­ergy from other dis­cus­sions around the world. Th­ese will con­tinue into the sec­ond half.”

Innes Ker said the pos­si­bil­ity of a Trump pres­i­dency could cre­ate global eco­nomic un­cer­tainty in the next few months.

“Our view re­mains that Clin­ton is the more likely can­di­date to tri­umph in the end but the opin­ion polls in­di­cate it is a lot closer than would be gen­er­ally de­sir­able. The var­i­ous parts of his eco­nomic pol­icy plat­form are ei­ther mu­tu­ally con­tra­dic­tory or highly ir­re­spon­si­ble.”

Louis Kuijs, head of Asia eco­nom­ics at Ox­ford Eco­nom­ics, said a lot of the im­me­di­ate con­cerns about the Chi­nese econ­omy are no longer to the fore. “I think for the fi­nan­cial mar­kets and what wor­ries peo­ple day to day, China is now less pro­nounced. They are not so con­cerned about the risk of sud­den cap­i­tal out­flows or of a very sud­den change in the cur­rency,” he said. “But al­though China is not so much on the radar screens, a sig­nif­i­cant slow­down in China is un­for­tu­nately by far the No 1 con­cern peo­ple have. When we do a poll ev­ery quar­ter of our clients, it still comes up as the biggest risk to the global econ­omy.”

An­gus Ni­chol­son, mar­ket an­a­lyst in Mel­bourne for IG Mar­kets, the global bro­ker­age, says the PMI data pre­sented an over­all pic­ture of sta­bil­ity. China’s GDP rate in the first half year

“If you look at the of­fi­cial in­dex as a whole, out­put has been very solid and that is very pos­i­tive,” he said. “The small and medium-size com­pany sub com­po­nent un­der­per­formed in July, with many of the gains com­ing from the large cor­po­rates which may have ben­e­fited from the gov­ern­ment’s ex­pan­sion­ary poli­cies. “The pic­ture is slightly con­fused be­cause the Caixin showed a big jump in the per­for­mance of the SMEs so we need to see more data to un­der­stand what pre­cisely is the trend.”

Jing Li, an economist with HSBC in Bei­jing, said that al­though there was sta­bil­ity in the of­fi­cial PMI fig­ures, the gov­ern­ment may need to give con­tin­ued sup­port to the econ­omy. “De­spite the sta­bi­liza­tion in the man­u­fac­tur­ing sec­tor, weak­nesses in ex­ter­nal de­mand, as well as frag­ile busi­ness sen­ti­ment in the pri­vate sec­tor pose down-side risks to growth. To this ex­tent, we be­lieve more growth-sup­port­ive poli­cies, such as ad­di­tional pol­icy rate cuts, RRR cuts, and faster fis­cal ex­pan­sion are still war­ranted.”

She said the slight un­der­per­for­mance of the of­fi­cial PMI was due to the gov­ern­ment’s pol­icy of re­struc­tur­ing sta­te­owned en­ter­prises.

“It is more sen­si­tive to cor­po­rate re­struc­tur­ing ac­tiv­ity in heavy in­dus­try and eased back slightly be­cause of weak­en­ing pro­duc­tion. The non­man­u­fac­tur­ing PMI con­tin­ued to ex­pand ro­bustly, as a re­sult of a strong per­for­mance in the trans­porta­tion, telecom­mu­ni­ca­tions and tourism sec­tors.”

China’s sec­ond-quar­ter data also pointed to the econ­omy con­tin­u­ing to re­bal­ance away from heavy in­dus­try to­ward con­sump­tion and services.

Con­sump­tion con­trib­uted 4.9 per­cent­age points (73.4

in a shopping mall in Hangzhou, Zhe­jiang prov­ince. China’s econ­omy did not slow down in the first half year.

per­cent) to GDP growth in the first half, up from 4.2 points in the same pe­riod last year. Mean­while, in­vest­ment’s share of growth was 2.5 points (37.3 per­cent), down from 2.9 points.

Con­sump­tion was boosted by re­tail sales, which were up 10.6 per­cent in June, well ahead of ex­pec­ta­tions, and are now ris­ing at the fastest rate since De­cem­ber. Innes-Ker at the EIU be­lieves the re­cent data over­states the tran­si­tion go­ing on in the econ­omy.

“The un­der­ly­ing story is that the econ­omy is re­bal­anc­ing and you are see­ing a shift to­ward services and con­sump­tion but I fear the cur­rent data is prob­a­bly over­stat­ing the tran­si­tion.

“I think this is be­cause what we are see­ing is some form of re­clas­si­fi­ca­tion go­ing on in the com­pi­la­tion of the data. Some in­dus­tries that would be re­garded as sec­ondary (man­u­fac­tur­ing) are now be­ing de­scribed as ter­tiary (services).”

Mag­nus, also an as­so­ciate at Ox­ford Univer­sity’s China Cen­tre, says that al­though there is ev­i­dence of re­bal­anc­ing tak­ing place, the progress is not as fast as pol­i­cy­mak­ers would like.

“It is al­ways pos­si­ble to find anec­do­tal ev­i­dence of re­bal­anc­ing, and in­cre­men­tally, one could ar­gue that China is re­bal­anc­ing slowly. But if we take re­bal­anc­ing to mean a fun­da­men­tal shift in the con­sump­tion share of GDP at the ex­pense of in­vest­ment and also a par­al­lel shift of the state share of the econ­omy in fa­vor of the pri­vate sec­tor, then re­bal­anc­ing is not mak­ing much progress.”

One of the more wor­ry­ing as­pects of the sec­ond-quar­ter data was the weak­en­ing in pri­vate sec­tor in­vest­ment, which fell to a record low, grow­ing just 2.8 per­cent year-on-year. The pri­vate sec­tor ac­counts for 60 per­cent of China’s to­tal in­vest­ment and some 80 per­cent of all jobs.

This new data came af­ter a new study by econ­o­mists at Pek­ing Univer­sity, that showed pri­vate sec­tor gear­ing had fallen from 48 per­cent in 2008 to 35 per­cent in 2015, in­di­cat­ing the dif­fi­culty pri­vate com­pa­nies had ob­tain­ing fi­nance.

Larry Hu, China economist at Mac­quarie Se­cu­ri­ties, told the Fi­nan­cial Times that weak pri­vate sec­tor in­vest­ment was the most im­por­tant data point in the re­cent fig­ures. “Whether pri­vate in­vest­ment can turn round in the com­ing months is the key to the Chi­nese econ­omy in the sec­ond half,” he said.

One of the ma­jor ques­tions is to what ex­tent growth is be­ing sup­ported by a surge in credit.

Credit growth in the econ­omy this year, at 16 per­cent, is grow­ing at al­most dou­ble the rate of nom­i­nal GDP of 8.4 per­cent (growth when tak­ing into ac­count price ad­just­ments). Such credit growth is adding to debt, which ac­cord­ing to some es­ti­mates is now 250 per­cent of GDP.

Kuijs said the au­thor­i­ties have set an ob­jec­tive to rein in credit ear­lier this year.

“This is ab­so­lutely not sus­tain­able and should be ris­ing at the same pace as the econ­omy.”

Liu Zhiqin, se­nior fel­low of Chongyang In­sti­tute for Fi­nan­cial Stud­ies at Ren­min Univer­sity of China, in­sists that us­ing credit to boost the econ­omy is the right ap­proach.

“I do not be­lieve it is the big prob­lem that some sug­gest. Most of China’s debt is owed in­ter­nally. I think the gov­ern­ment is right to in­vest in in­fra­struc­ture and other ma­jor pro­jects to drive eco­nomic growth,” he said.

“You only have to con­trast this with what is hap­pen­ing in many West­ern coun­tries which are fol­low­ing debt re­duc­tion aus­ter­ity poli­cies and have, as a re­sult, weak growth.”

“The fun­da­men­tals of the Chi­nese econ­omy re­main pos­i­tive and I think the coun­try will achieve strong and bal­anced growth and at the same time drive global growth,” Liu said.

The sec­ond-quar­ter data was rel­a­tively sta­ble and has al­lowed China to slip down the ranks of global con­cerns.” Asia re­gional di­rec­tor for The Economist In­tel­li­gence Unit

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