China fights economic war

WOES: DEBT, POVERTY, POLLUTION PROBLEMS

Slowdown in construction seen as the ‘biggest fault line’.

China’s economy begins 2018 facing what its own leaders call three years of “critical battles”. Those fights to tackle domestic debt, poverty and pollution pose a hat-trick of risks to the world’s number two economy even before higher interest rates and trade war threats from the US are considered.

While the nation is starting from a position of strength, with full-year growth in 2017 poised for its first acceleration since 2010, the expansion is seen slowing in 2018.

Forecasters see expansion slowing to 6.5% — the slowest pace since 1990 — this year, and the following are among areas they flag as having the potential to trip up economic growth or spur market turbulence.

Financial risks

The Communist Party recently renewed its pledge to prevent and control financial risk, calling it a pivotal challenge for the next three years. As the financial system opens further to foreign firms, a debt-to-GDP ratio that’s heading toward more than 320% by 2022 stands as the main danger.

“Financial instability is the core problem,” said Pauline Loong, managing director at research firm Asia-Analytica in Hong Kong. “Solve that and you ease pressure on capital outflows, complications from deleveraging, weaknesses in smaller banks.”

Construction slowdown

The tightening of financial and environmental regulations to help curb debt may cause tremors in 2018 that slow housing and infrastructure construction, according to Frederic Neumann, co-head of Asian economics research at HSBC in Hong Kong.

“A sharper-than-expected slowdown in construction could thus weigh on broader activity with emerging sectors not yet vigorous enough to provide a sufficient cushion,” said Neumann. “The biggest fault line running through the Chinese economy is the construction sector.”

Trade brawl

US President Donald Trump’s recent national security strategy speech was a “tee up” for a turn toward protectionism, says David Loevinger, a former China specialist at the US Treasury Department.

“On the menu for 2018: lots of red meat for the base, and that means bashing imports,” said Loevinger. “Since nationalistic populism is as irresistible in China, Chinese politicians will feel compelled to retaliate.”

Fed, tax

If the US Federal Reserve raises interest rates more than markets expect and tax cuts build on underlying 3.2% growth, the dollar may get a second wind that puts the yuan and capital outflows under pressure again, comments George Magnus, an associate at Oxford University’s China Centre.

“If the Fed starts hiking and the dollar goes on a bull run, that would cause big problems,” adds Christopher Balding, an associate professor at the HSBC School of Business at Peking University in Shenzhen.

North Korea

Should tension between the US and North Korea escalate into a more significant confrontation, there will be profound and far-reaching consequences, not just for China’s economy but that of the entire Asia-Pacific region, says Zhu Ning, deputy director of the National Institute of Financial Research at Tsinghua University in Beijing. – Bloomberg