Live TV interview on 6 June on TRT(Turkish Radio and Television Corporation), Turkey's international English-language broadcaster, on US-China relations, the subject of the 8th US-China Strategic and Economic Dialogue (S&ED) being held in Beijing.
A full-length article in The National Interestdated 9 May 2016 authored by Madam Fu Ying, Chairperson of Foreign Affairs Committee of China’s National People’s Congress and Mr. WU Shicun, President of the National Institute of the South China Sea Studies, explains China's historical territorial claims in the South China Sea, the twists and turns of changing geopolitics and the United States" growing involvement under its Pivot to Asia.
Based on interviews with 10,000 consumers aged 18 to 65, in 44 cities, a Mckinsey Report of April, 2016 finds that, despite current economic downturn, Chinese consumers remain confident—and in 2015 they continued to substantially increase spending within and outside China. Nevertheless, there is regional divergence, as in Harbin, where consumer confidence faces steep decline.
There are distinctive shifts from products to services, from mass products to premium brands (including loyalty to top international brands), from mere goods to lifestyle, health and well-being, from Online to O2O (Online-to-Offline), from in-store shopping to associated leisure experience on-site such as restaurants and cinemas, and from individual to joint family leisure activities.
Click here for the 2016 McKinsey China Consumer Report - The Modernization of the Chinese Consumer, with the following synopsis -
"The eyes of the world are on the Chinese consumer. Cooling economic growth, a depreciating currency, and a gyrating stock market are making political and business leaders concerned that China’s economic dream may have finally ended, and tough times lie ahead. Despite the gloomy news about the state of the economy, consumer confidence has remained surprisingly resilient over the past few years, as salaries have continued to rise and unemployment has stayed low. Chinese consumers remain upbeat about their futures. However, beneath this statement lurks significant change. The days of broad-based market growth are coming to an end as consumers become more selective about where they spend their money. Spend is shifting from products to services, and from mass to premium segments. Consumers are seeking a more balanced life, where health, family, and experiences take priority. In short, our research suggests that winning in the China market will become more challenging for consumer goods companies. For those that get it right, however, the reward will be substantial".
"The survey results also highlighted the astounding popularity of internationaltravel among Chinese consumers and their exceptionally rapid adoption of trends such as mobile payments. In addition, the study confirmed the great variation in consumer behavior among China’s 22 city-clusters. Cluster differences have even increased in recent years, despite the increased flow of information between clusters online and growth in domestic travel."
According to a research report of 15 April, 2016 of Natixis, a French Corporate and Investment Bank created in 2006,
"The PBoC announced that foreign central banks can invest in the interbank bond and fx market in China without any limit. This does not only apply to investments, but also the repatriation of funds1 in RMB or converted into foreign currencies".
"In the long run, foreign central banks holding CNY interbank assets would boost the corporate confidence in CNY assets, as well as China’s interbank bond market and interbank fx market. Together with the recent policy of opening up the interbank bond market to foreign investors by removing the interbank bond market investment quota, we expect there will be more capital inflow into China in the long term".
It's very early days yet but the move signals a vision that one day, the RMB will form a significant part of foreign central banks' assets, alongside with the greenback and other recognized global currencies like the euro, British Pounds and Japanese yen.
China’s Five Year Plan 2016-20 aims to shift to higher value-added and more sustainable development, doubling 2010 national income by 2020. Many China-watchers remain largely unimpressed. Some conclude that China is now stuck between a rock and a hard place. The current model is unsustainable without far-reaching structural reforms while Beijing remains nervous and appears to muddle through with financial stimulus. The way forward seems pointed more to sunset rather than renaissance.
Let’s try to see through the mist.
According to the Premier’s latest Work Report in Beijing, GDP grew by 6.9% to $10.3 trillion in 2015. 13.12 million urban jobs were created, with 7.4% rise in per capita disposable income and a reduction of 14.42 million rural persons below the poverty line. Utilized direct foreign investment amounted to $126.3 billion while outbound foreign direct investment grew to $118 billion. This picture of slowdown does not seem to signal impending paralysis.
Let’s turn to consumption and services.
Consumption seemed to have stalled from 38.3% of GDP in 2006 to 38.2% of GDP in 2015. This comparison, however, ignores the expansion of economy from $2.3 trillion in 2005 to $11.3 trillion in 2015. A similar percentage of a doubled economy equals tremendous growth. Chinese private consumption growth over 2005-14 bested major economies, averaging 8.9% annually compared with 7.3% for India and 1.8% for the United States. Click here
Economic slowdown notwithstanding, evidence points to considerable pent-up demand. China’s “Singles' Day” online shopping in November 2015 splurged $9.3bn in 12 hours. Outbound Chinese tourists number 100 million annually. Galleries Lafayette in Paris continued to report strong sales to Chinese tourists, which accounted for 33.7% of sales in 2013-14. An addition of 260 million affluent Chinese consumers is expected in the next decade. Click here Additionally, McKinsey & Co estimates that China's working and retirees will account for 18% and 10% respectively of global urban consumption growth from 2015-30.
As for services, this sector started to exceed the contribution from industrial production in 2012. Output of services as a share of GDP in 2015 is estimated to total 49.2%, compared to 41.9% for industry. Click here
Much has been made of “supply-side reform”. What this means are de-stocking excess capacity, de-leveraging debt, streamlining bureaucracy, reforming state-owned enterprises, liberalizing currency and interest rate, and providing better social security and a greener economy.
China is drastically reducing excess coal capacity in developing a greener economy. China's coal consumption fell by 2.9 % in 2014 and by 5 % in 2015. As a result, global CO2 emissions may have declined by about 0.6 % in 2015, an astonishing outcome, if confirmed. China reduced its energy consumption per unit GDP by nearly 20% from 2006-2010, and a further 16% reduction by 2015. At this rate, China may achieve her Paris climate commitments well before the 2030 target. Click hereand hereThis Five-Year Plan is the greenest ever yet, aiming to deliver 45% carbon intensity reduction by 2020. Click here
There is likewise much de-stocking in the steel industry, using online trading to help speeding up the process. Click here
It is therefore no longer meaningful to correlate China’s growth with electricity consumption, a source of skepticism with China’s real GDP growth rate. The former “Li Keqiang Index” has become obsolete. Click here
As for state-owned enterprises (SOEs), China wants them to become internationally competitive, playing the transitional role of South Korea’s chaebols. A plan is recently launched to transform 112 SOEs into 40 bigger conglomerates with a view to eliminating duplication, enhancing synergy and streamlining corporate efficiency. The recent merger between stated-owned train-makers CNR and CSR Corporation is also a case in point. More of such mergers can be expected.
Debt, however, remains a ticking time bomb. As for household debt, a looming mortgage crisis is not inevitable as gearing remains comparatively low and stringent measures are introduced to curb speculation. Corporate debt is more worrying. China’s central banker Zhou Xiaochuan has alluded to substituting it with equity financing. That cannot be effective without a further opening of China’s capital market, supported by sophisticated regulatory infrastructure. This liberalization will also enhance free capital flow needed to boost the renminbi’s global status, on which China sets great store. Recent reflex actions and immature market expediencies notwithstanding, China’s learning curve must not be conflated with resisting, let alone rolling back financial reform.
With shrinking demographics, overcoming the “middle-income trap” without jumpstarting productivity seems an impossible task. A great deal depends on innovation and quality of the workforce. China’s education spending has grown by 20% annually since 1999. Adding some 7 million university graduates a year, China is poised to have some 200 million graduates by 2030, more than the entire US current workforce. Moreover, China is on track to become the world’s top R & D spender by around 2019. China’s human capital is further enriched by overseas Chinese student returnees. 364,800 students returned to China in 2014, an increase of 3.2% over 2013. Since 1978, a total of 3.5 million Chinese have studied abroad. The total return rate to 2014 stands at 74.5%, thanks in part to an “overseas professional returnees program” with attractive terms. Click here
According to the World Intellectual Property Organization (WIPO), China has been the world’s top filer of patents and trademarks every year since 2012, responsible for a third of all patents filed. While quantity does not equal quality and China still lacks Nobel Laureates, world-class Chinese entrepreneurial disrupters* are beginning to emerge to define the rules of e-commerce. According to a report in the New York Times, Chinese start-ups are poised to take leap in developing a driverless car.
(*China’s Disruptors – How Alibaba, Xiaomi, Tencent, and other companies are changing the rules of business, Edward Tse, Penguin Random House, UK, 2015)
What is more, China has been transiting from a model based on "Make in China", to "Created in China", through to "Owned by China". Recent examples include Wanda's万达集团 acquisition of AMC and Legendary, one of United States' largest cinema chains and film studios; Flagship Entertainment Group 旗舰影业, a new joint venture between China Media Capital (CMC) 华人文化产业投资基金 and Warner Bros Entertainment for global film production and distribution; and the acquisition from KKR by Shandong Ruyi 山东如意纺织集团有限公司, one of China's largest textile producers, for a 70% stake in SMPC, a leading French fashion company.
Yes, China is clamping down on civil society. While charting a potentially turbulent course towards the 2020 goals, stability trumps everything else. Meanwhile, however, a new charity law has just been adopted to promote home-grown philanthropy. According to PEW, an independent public opinion research center based in Washington DC, while corruption, pollution and inequalities remain Chinese people’s top concerns, there is widespread belief that standard of living has improved. In 2008, 66% of Chinese said their personal finances were good. In 2015, 72% hold this view. Warts and all, how the country is managed seems to retain majority support. There is no mileage for regime change.
Do I want to bet on China’s chances of fulfilling the Five Year Plan? Probably not, as the tasks ahead are herculean and many black swans could appear. But considering her track record, I am not convinced that China is now so hamstrung that she can only sleepwalk towards sunset.
China has formally approved the Five Year Plan (2016-20), which aims to double 2010 income levels by 2020, striving to overcome the "Middle Income Trap" towards a moderately well-off economy. Details of the Five Year Plan are contained in the full textof Premier Li Keqiang's Work Report delivered at the 2016 National People's Congress/Chinese People's Political Consultative Conference (NPC/CPPCC) "Two Sessions" on 5 March, 2016.
The Plan marks the "opening years" of a make-or-break battle to transit to a different development model. The desired shifts are nothing less than dramatic, from exports towards services and domestic consumption, from labor and energy-intensive manufacturing towards innovative, higher-technology and higher value-added production, and from growth characterized by quantity to quality and ecological sustainability.
Considering China's size and diversity, the transformation is unlikely to happen without upheaval, pain and dislocation, including a relatively slower growth rate. My live TV interview on 16 March 2016 with ABC (Australian Broadcasting Television) highlighted some of the domestic and external challenges facing the Five Year Plan.
Those who focus exclusively on China's economic convulsions and short-term stimulus measures are generally underwhelmed by the new Five Year Plan. Download BBVA - CHINA Five-Year Plan 2016-20Amidst Party-speak characteristic of the "Two Sessions", it is easy to lose sight of some game-changing realities.
Notwithstanding weak global economic conditions, China’s economy has grown from $2.3 trillion in 2005 to $11.3 trillion in 2015.Personal per capita disposable income increased by 7.4% in real terms, overtaking the growth rate of the economy. Premier Li pointed out that one percentage growth now equates in size to 1.5 percent five years ago.
Consumption's share of a much larger economy signifies tremendous growth. According to a reportof the US Congressional Research Service of 21 October, 2015, the growth of Chinese private consumption over 2005-14 was among the fastest of any major economy,averaging 8.9% annually compared with 7.3% for India and 1.8% for the United States (Fig. 25, p.35). Evidence points to continuing surges of private consumption even when the country’s overall growth is slowing down. China is already the world’s top market for “e-tailing”, valued at US$615 in 2015, bigger than Europe and the US markets combined. The “Singles' Day” in November 2015 splurged $9.3 billion in 12 hours on world's biggest online shopping day. Clearly there is much pent-up demand. Under the Five Year Plan, more supportive measures (e.g. lower taxes) will be provided to boost consumption.
China's economic transformation necessitates turning some 100 million rural migrants into working urbanites and consumers.The household registration system (hukou) has been changed to provide them with social security and children education on par with urban citizens. In 2015,7.72 million government-subsidized housing units were completed in urban areas. In 2016, 21 million new job-training opportunities will be provided to assist rural migrants in urban relocation.
According to the Congressional report, in 2015, services as a share of GDP grew to 49.2%, surpassing industry's at 41.9%. This tallies with the Premier's reported increase of services' share to 50.5% of the GDP for the first time. Services will be further promoted in the coming years.
Innovation and private enterprise have registered significant headway. Business startups and innovations flourished, with newly registered businesses rising by 21.6% in 2015, averaging 12,000 new businesses per day. The Made in China 2025 initiative has been introduced to upgrade manufacturing nationwide. By 2020, investment in research and development is expected to reach 2.5% of GDP. The aim is for contribution of scientific and technological advances toward economic growth to reach 60%.
The Premier reiterated the imperative of state-owned-enterprise reform, including "zombie enterprises".SOEs are to have mixed public and private ownership. Some will be transformed into state-owned investment companies (similar to Singapore’s Temasek). Measures are introduced to drastically reduce over-capacity, excessive stock, and over-indebtedness, using instruments such as packaged sale of non-performing loans. At the same time, local government bondsare issued to replace outstanding debt, lessening interest payment burdens. Fiscal, tax, financial, and other key reforms were deepened. Pilot free trade zones were established in Guangdong, Tianjin, and Fujian based on the model of the China (Shanghai) Pilot Free Trade Zone. These are all part of a Supply Side Reformdesigned to achieve a leaner, more streamlined, higher-quality and more competitive economy.
Vigorous measures are introduced to combat air pollution, cherishing a "beautiful" China Dream of "green hills, clear waters, and blue skies". According to a Roadmap of Chinese Academy of Sciences, fossil energy’s share of the nation’s total energy consumed is expected to decline from 92.7% in 2007 to 45% by 2050, while renewable energy is expected to rise from 6.5% to 45% and nuclear energy from 0.8% to 10% over the same period. (Science and Technology in China: A Roadmap to 2050, Strategic General Report of the Chinese Academy of Sciences, Science Press Beijing, Springer Heidelberg Dordrecht London New York, 2010). As reported by the Brookings Institution, President Xi Jinping, at a high-level meeting in June 2014, called for a sweeping energy revolution in China in five areas: demand, production, technology, institutional governance, and global markets. Among the objectives are energy efficiency, reduced energy intensity, energy sustainability, and reduction of emissions. Over the period 2016-20, water consumption, energy consumption, and carbon dioxide emissions per unit of GDP are to be cut by 23%, 15%, and 18%, respectively, while forest coverage is to reach 23.04%.
By way of Intended Nationally Determined Contribution (INDC) under the COP21 Paris Climate Agreement, China committed, with reference to 2005 levels - (a) to achieve peak carbon dioxide emissions around 2030; (b) to lower emission intensity per unit of GDP by 60-65%; (c) to increase the share of non-fossil fuels in primary energy consumption to around 20%; and (d) to increase forest stock by around 4.5 billion cubic meters. A 20-billion-yuan (about US$3 billion) China South-South Climate Cooperation Fund will be set up to support other developing countries in combating climate change. China's INDC aims to double wind capacity to 200 gigawatts and to more than triple solar capacity to 100 gigawatts by 2020 from 2014 levels. This expansion is supported by the dramatic growth of non-fossil generation capacity over 2010-2014. Solar capacity jumped by 3,161.6% to 28.05 gigawatts, wind capacity by 225.8% to 96.37 gigawatts, nuclear by 83.7% to 19.88 gigawatts, biomass by 72.4% to 9.48 gigawatts, hydro by 39.7% to 301.83 gigawatts, and geothermal by 7.1% to 0.03 gigawatts. Overall, the increase had been 73.3% to 455.64 gigawatts in just four years.
In order to reduce emissions by 40-45% by 2020 relative to 2005, coal consumption is being tightened. A strenuous battle against air pollution and coal usage started a few years back. In September 2013, six ministries jointly launched the Air Pollution Prevention and Control Action Plan in the Beijing-Tianjin-Hebei Region. This requires PM2.5, or “fine particle,” concentrations in the Region to be reduced by 25% from 2012 level. The Region’s total coal consumption is to be reduced by 83 million tons by 2017.
An Environmental Protection Law was enacted effective 1st January 2015, including accumulative fines with no ceiling, provision for law suits by environmental NGOs, and sharpening accountability of local governments. An Environmental Impact Assessment system will be embedded in relevant legislation. A new Air Pollution Prevention and Control Law came into force on 1st January, 2016. Laggard cities are required to publish detailed plans to achieve emission reduction targets with public input and regular updates. Party secretaries are held to account for their green credentials in judging their promotion prospects.
At the 2013 Communist Party’s 18th Central Committee Third Plenum, China decided for markets to play a decisive role in allocating resources. Environmental market instruments include price reforms, subsidies and taxes, and emissions trading schemes (ETS). Seven pilot ETS have been launched over 2013-2014: Shenzhen, Shanghai, Beijing, Guangdong, Tianjin, Hubei, and Chongqing. They apply to energy-intensive sectors covering 35-60% of the total emissions of the respective region and 10% nationwide. These pilots combined make up the second-largest ETS in the world after Europe. They translate into 650 million to 700 million tons of CO2 in 2014, compared with 2.1 billion tons in Europe, 382 million tons in Australia and 165 million tons in California. A national emission trading system (ETS) is expected to be launched in 2017 covering key industry sectors such as iron and steel, power generation, chemicals, building materials, paper-making, and non-ferrous metals.
China is also considering carbon taxes. At the China-U.S. Strategic and Economic Dialogue in July 2013, Finance Minister Lou Jiwei confirmed that China would expand environmental taxes to include carbon in due course.
The share of non-fossil fuels in primary energy consumption is mandated to expand to 15% by 2020 and 20% by 2030. To achieve these targets, a "green dispatch system" is to be implemented in favour of renewable sources in electricity distribution, supported by rapidly growing solar and wind capacities. Clean coal measures, coal caps and coal-free zones are to be introduced while vehicle fuel quality standards are to be enhanced.
Half of China’s energy use today is subject to mandatory efficiency standards. With a national emissions trading scheme expected in 2017, the Chinese economy is on the way towards 85% less energy-intensity compared to the past 25 years. With large-scale deployment of wind, solar, hydro and nuclear power, China’s CO2 emission growth is expected to flatten, to peak around 2030.
To realize the above goals, half a trillion RMB (UD$ 77 billion) has been earmarked to invest in housing, agriculture, rail network in inner provinces, technological upgrading, innovative industries, energy conservation, ecological re-construction, education, healthcare, culture, sports and poverty relief. Some of this investment are prone to misinterpretation as short-term stimulus. Click here However, it is evident that the progress outlined above has not come about as a result of opening the spigots.
On civil society, a new law is introduced to formally recognize and regulate non-government and charitable organizations. Emphasis is also being placed on the Rule of Law and accountable governance. All of the above, along with the anti-corruption campaign, are imperatives to reboot the legitimacy of the Communist Party.
Last year alone, 13.12 million new urban jobs were created amidst difficult economic conditions worldwide. The 13th Five Year Plan (2016-20) calls for a total of 50 million-plus new urban jobs over the next five years. The targets in the new Five Year Plan do not appear over-ambitious compared with those in the preceding Plan (2010-15), which has been successfully achieved. Indeed, successive Five-Year Plans have a consistent record of successful realization.
Implications of the 13th Five Year Plan (2016-20) for the rest of the world would include the following -
Demand from China for resources is set to slow down further, including steel and other minerals.
More labor-intensive operations are likely to move offshore.
Increased demand can be expected for branded consumer goodsfor China's rising middle-class.
More capital will be going out to seek investments, under the One Belt, One Road initiative, in countries including Europe with UK poised to be a prime target ( McKinsey & Co - China 2016 )
More demand for joint ventures in high-technology and green businesses.
Reforming the Militaryis part and parcel of President Xi Jinping's "China Dream" of national renaissance by restoring the nation's historic world prominence.While China's military modernization and expenditure have been advancing significantly over the years, the 2016 Military Budgetregisters the first single-digit rise (7.8%) since 2010, much smaller than originally expected by the rest of the world. The People's Liberation Army is to shed 300,000 soldiers. The whole military command system and configuration have been totally streamlined and revamped. The Central Military Commission is put in overall command with military regions transforming into all-dimension combat-ready bodies, including integration of the army, navy and air force and "rocket (missile defense) units".
As I said at the TV interview, China's growing military capabilities to defend her territorial claims and integrity are bound to rattle relationships with her neighbors and with the world's current superpower, the United States. No doubt, the relationship between China and the United States is set to define the world order in the 21st century.
All in all, China's Rise is set to present epochal challenges as well as opportunities. In short, it needs to be better understood and carefully managed by all nations.
My live TV interview on 16 March 2016 with ABC (Australian Broadcasting Television) highlighted some of the domestic and external challenges facing the Five Year Plan (2016-20), which is no less than a historic watershed for China's changed socioeconomic trajectory.
In his Brookings blog of 9 March, Bernanke opines that "China faces the classic policy "trilemma" of international economics, that a country cannot simultaneously have more than two of the following three: (1) a fixed exchange rate; (2) independent monetary policy; and (3) free international capital flows. Accordingly, China’s ability to manage its exchange rate may depend, among other factors, on its willingness and ability to adjust on other policy margins".
Bernanke sets up and disparages three straw men: (a) One-off massive devaluation (b) Tightened control to prevent capital outflows (c) Wait for growth to return. Instead, he advocates a better solution via proactive fiscal policies. These are designed to facilitate China's transition towards a more liberal and sustainable economic model e.g. improving social security, re-training, tax-cuts or tax-credits for innovative small-and-medium-sized enterprises, and meaningful reform of monopolistic but inefficient State-Owned Enterprises.
Says Bernanke, "There are recent indications China might be moving this direction. On Saturday, Premier Li Keqiang noted the budget deficit target for 2016 would be 3.0%, an increase from 2.3% in 2015. Mr. Li also spoke about using “mergers, reorganizations, debt restructuring and bankruptcy liquidations” to deal with “zombie enterprises”—failing state-owned enterprises supported by government assistance—and added that the government will spend $15.3 billion to help those laid off as a result. Further fiscal reform measures were announced on Monday".
Bernanke's blog appeared in the middle of the "Two Sessions" in Beijing where 3,000 provincial administrators, top businessmen and Chinese Communist Party (CCP) bigwigs met as China formally unveiled the nations's next Five Year Plan (2016-20).
At the start of the Two Sessions, Premier Li's Work Report included new fiscal policies including some along the lines mentioned in Bernanke's blog. Let's not forget that such an important national policy document is not the outcome of a last-minute drop of a hat. For months and even years before, the main thrusts of the Premier's draft Report had been extensively discussed and debated both internally and internationally with national and foreign experts.
Indeed, at the height of the global financial crisis, China's economic re-structuring in the context of her exchange rate policy had been hotly dissected and debated among leading policy formulators, thinkers, central bankers and financiers across the globe. (See Debating China's Exchange Rate Policy, Morris Goldstein and Nicholas Lardy, (ed.), Petersen Institute for International Economics, 2008, pp. 100-108 - "The Open Economy Trilemma: An alternative view from China's perspective", Jin Zhongxia,(now Deputy Director-General of the People's Bank of China, the nation's central bank).
Regardless of the origin of these fiscal insights, China-watchers should perhaps wake up from the notion that China is now "walled-in" between a rock and a hard place where the only game in town seems more and more stimulus and devaluation of the RMB. Or the notion that China's short-term growth measures are sacrificing the opportunity for the imperative of structural reform. (See China NPC Reaction: Targets point towards new focus on growth and financial stability, a research note dated 8 March, 2016 of BBVA, a global Spanish bank) Download BBVA China Flash on NPC2.