CHINAwatch

Walled In: China's Great Dilemma - Is China stuck between a rock and a hard place and the only way is drifting towards sunset?

A January 2016 Goldman Sachs Investment Strategy Group Insight Report Walled In: China's Great Dilemma expects China to grow between 5.8% and 6.8% and avoid a hard landing in 2016.

However, its outlook for 2016–20, which spans China’s 13th Five-Year Plan, is more pessimistic. It envisages a low probability of China achieving 6.5% growth rates while rebalancing the economy. Moreover, it considers that China is unlikely to escape the “middle-income trap” and will not be able to challenge US preeminence over the next several decades, and possibly beyond. In fact, according to the report, China is more likely to follow the path of Japan, where unfavorable demographics and excessive debt have led to slower growth and bouts of deflation.

The report’s prognosis is based on the following consideration -

"1. China’s growth will inevitably slow to substantially lower rates over the next decade.
2. The path China will follow is highly uncertain as growth slows.
3. China will incur greater risks as it attempts to implement reforms while maintaining control of the financial markets and the economy.
4. China’s debt will continue to grow, making any eventual deleveraging process as painful as it has been in the US and the peripheral countries in the Eurozone.
5. China’s financial markets will be much more volatile without any increase in expected returns.
6. China’s profile today has many parallels to Japan in 1990”.

The report puts forth two scenarios for the next five years (2016-20):

• The Likely Path (Base Case Scenario): China’s 6.5% minimum growth target is achieved for say, two to three years, through rapid investment and increased debt. Thereafter, GDP growth rates decline steadily.

• An Alternative Path: China’s leadership forgoes the 6.5% target and, instead, focuses on implementing reforms and slowing the pace of credit growth.

Both scenarios do not see that the target growth rate of 6.5% can be maintained with economic restructuring, pointing to the possibility of China being trapped in Japanese-styled “lost decades”. 

“Anyone who speaks with great certainty [about China] needs their head examined,” the report warns. I totally agree, as China is such a vast and rapid work-in-progress. So due account has to be taken of both sides of the picture from different perspectives if a more balanced view is to be gained.

While the 74-page report has a great deal to commend itself and its prognosis may well be spot-on, the following perspectives need to be kept in mind.

Economic re-structuring towards higher consumption

China’s slowdown has resulted in a great deal of doom and gloom around the world. Much blame has been attached to China’s perceived economic and financial mismanagement. Pessimism about the 6.5% target is largely due to insufficient domestic consumption in relation to capital investment. Discouragingly on the surface, consumption accounted for 38.3% of China’s GDP in 2006 and 38.2% of GDP at the end of 2015. However, this comparison ignores the fact that China’s economy has grown from $2.3 trillion in 2005 to $11.3 trillion in 2015. So consumption at 38.2% of a much larger economy signifies tremendous growth.

Indeed, according to a report of 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”. China’s “Singles' Day” in November 2015 splurged $9.3bn in 12 hours on world's biggest online shopping day. The Goldman Sachs report also quotes impressive sales figures of multinationals and local restaurants, retail outlets and cinemas (p.19).

The economy also begins to show convincing signs of shifting away from investment and industrial output. Services started to exceed the contribution from industrial production in 2012. The EIU estimated that in 2015, output of services in China as a share of GDP would total 49.2%, compared to 41.9% for industry, according to the Congressional report (p.32). 

As labor and resource intensive industries are giving way to new industrial processes and services, a massive number of jobs have been shed. Those retrenched often end up in the small or informal business sector in small towns and villages. As the service sector picks up, the labor market generally remains reasonably tight. According to data in the Goldman Sachs report (Exhibit 49), the unemployment rate remained flat, if not declining, in a respectable range between 4% to 4.4%.

Market and state-owned enterprises

The Third Plenum in November 2013 affirmed a “decisive role of the market”. It seems to contradict the Plenum's opening statement that “public ownership” would remain the “main body of China’s economy”. While some of China’s giant state-owned enterprises (SOEs) have risen to the world’s top league by market capitalization, their productivity and global competitiveness leave a lot to be desired. As noted in the Financial Times (19 November 2013), state-owned enterprises’ monopolistic privileges will be gradually “chipped away”.

Some of these changes are beginning to be implemented. For a start, SOE’s tribute to the state will be increased from 15% to 30% by 2020. According to a report in the South China Morning Post, guidelines jointly issued by the Party's Central Committee and the State Council mandated that SOEs are to have mixed public and private ownership. Some will be transformed into state-owned investment companies (similar to Singapore’s Temasek). Private banks are to be introduced. Concrete results are wanted by 2020. 

According to a report of Voice of America (26 March, 2015), China recently launched a plan to take 112 of its massive SOEs and merge them into 40 even bigger companies in the hope that they can become more competitive internationally. The merger between stated-owned train-makers CNR and CSR Corporation is to create a new entity capable of challenging foreign players like Siemens and Bombardier. More of such mergers are expected. 

However, it’s true that certain proposals to enhance SOE governance have been shelved, at least for the time being. Among them are the appointment of general managers by the board instead of the party and the removal of civil service ranks and perks for state-owned enterprise executives to make corporate profits their only concern. As SOEs are by definition assets of the state, it is understandable that national interests cannot be entirely be precluded from business considerations where strategic assets are involved.

Financial reform

China sets great store on the RMB playing a more influential role in the world. A milestone, even if symbolic, was reached when it was accepted as the third weighty world currency in the IMF’s elite basket of Special Drawing Rights. The Chinese currency’s continuing ascendancy is predicated upon the continuing opening up of China’s financial system. However, recent stock market gyrations and irregularities informed the Chinese leadership that all is not well with the state’s regulatory system. Pending the build-up of a more robust financial system, certain reflex actions and market interventions were introduced, for better or worse. It is part of China’s learning curve. But these ad hoc measures must not be conflated with rolling back financial reform.

Shadow banking

According to a research paper (16 March, 2015) of the Fung Global Institute, a Hong Kong-based think tank, the overall shadow banking asset size is still moderate compared with the size of the financial sector and GDP. At the end of 2014, China’s total shadow banking risk assets rose to RMB 32.2 trillion, or 51% of GDP, compared with a global average of 117% of GDP. 

China has an exceptionally high level of corporate deposit holding equivalent to 90% of GDP, compared with only 7% of GDP in the United States. As loans are often recycled back to the lending bank as deposits, this enables the banks to earn high interest spreads and acts as a cushion against any exigencies. 

China’s household debt (and gearing) remains comparatively low and does not support the contention of a massive mortgage crisis. 

Despite rise in credit volumes, China’s economy is not over-indebted while the government possesses adequate capacity to absorb losses. There are also massive private savings, offering scope for the corporate sector to undertake debt-equity swaps. 

Nevertheless, shadow banking has morphed into a roundabout-way of funding local government and private sector investments in real assets with moral hazard implications. China’s slower growth and adjustments in the property sector could escalate domestic financial risks impacting foreign banks and investors. China’s shadow banking sector is now closely monitored by various regulatory authorities. Nevertheless, more systemic reform and improved governance remain a critical issue. 

National debt

As for debt, a look at McKinsey Global Institute’s Debt-to-GDP Ratio -Country Ranking in 2Q 2014 may help to put the matter in a little perspective. At 217%, China ranks 22^nd out of 47 countries, compared with the following countries in the top ten rankings -

1. Japan (400%)
2. Ireland (390%)
3. Singapore (382%)
4. Portugal (358%)
5. Belgium (327%)
6. Netherlands (325%)
7. Greece (317%)
8. Spain (313%)
9. Denmark (302%)
10. Sweden (290%)

Moreover, a significant proportion of China’s debt is going into building infrastructure for history’s largest and fastest urbanization, which is not yet completed. This scale of urbanization is essential to overcoming China’s “middle-income trap” and is likely to supply the needed economic impetus. 

Urbanization, hukou system, and the consuming middle-class  

According to a report of the McKinsey Global Institute, the world’s top 600 cities will account for 60% of global growth to 2025. Of 136 new cities to enter the top 600, all will be from developing countries, with 100, the lion’s share, coming from China.

The country is undertaking the fastest and most extensive urbanization drive in human history. By 2025, China will have 221 cities with one million–plus inhabitants—compared with 35 cities of this size in Europe today—and 23 cities with more than five million. By 2030, China's urban population is expected to hit the one billion mark. In 20 years, China's cities will have added 350 million people, more than the entire population of the United States today.

It’s no surprise that China recently decided to revamp the hukou (household registration) system, granting millions of rural migrants their urban citizenship with social entitlements. On the cards are measures to provide them with financial support by allowing them to lease their rural land and to assist their accommodation in empty urban housing. Many of these migrants are still trapped in poverty. But by dint of hard work, many are eking out a livelihood for themselves and their dependents back home. Some have made good and become successful entrepreneurs. Given time, many will fill the lower ranks of China’s exploding consuming middle class. According to a report in The Telegraph  (28 January, 2016), using a floor as having wealth double the annual medium income for their country, it estimates that China’s middle-class has now grown to 109 million, larger than the United States.

Moderately high growth compatible with reform?  

There is little doubt that the Chinese leadership is determined to push ahead with economic re-structuring towards a higher-value-added, if slower, growth. The coming 13^th Five Year Plan is likely to incorporate the Made in China 2025 strategy released by the State Council on 19 May, 2015. The strategy focuses on 10 key sectors: New Information Technology; Numerically-controlled Equipment; Aerospace systems; High-tech vessels; High-Speed Rail; Energy Conservation; New Materials; Medical Devices; Agricultural Machinery; and Power Generation. 

On the one hand, these strategic goals signify a technological catching-up process. On the other hand, they are preparations for a new industrial era as highlighted in The Fourth Industrial Revolution, a report commissioned by Indian business and software services giant Infosys and launched at the January 2016 World Economic Forum in Davos. The investment opportunities as well as risks of epoch defining disruptive innovations and technologies (estimated to affect 5 million jobs across the globe) are likely to be huge.

China is also embarking on massive state and private outward investments across the globe. These investments are not confined to resources, technologies and markets for China’s goods, but extend to real estate, brands, telecoms, and a host of other businesses. A report in The Economist (16 January, 2016) on how Western enterprises are warming to Chinese acquisitions in such sectors as chemical businesses and the world’s largest cinema chains, speaks volumes.

This outbound trend is set to accelerate in the context of China’s game-changing, trans-continental One Belt, One Road (OBOR) initiative, linking China even more closely to Asia, the Middle East, Eurasia and Europe through infrastructure, trade and investments. This initiative is backed by the China-led Asian Infrastructure Investment Bank (AIIB) and a $40-billion Silk Road Fund.

While it is early days yet, China is already winning contracts in building high-speed rail in a number of countries along the Silk Road both in Asia and in Eurasia. President Xi’s first state visit to post-sanction Iran also signals that this global strategic initiative is for real.

As the world’s largest trading nation and the major trading partner of many countries along the OBOR, China remains central to the global supply and production chain. This, together with surging outward investments, is well positioned to yield economic dividends all around, including infrastructural building, corporate investments, expanded markets and trade links. All these will benefit China’s economic growth.

Indeed, according to the latest statistics, China’s economic performance is not as dire as it is portrayed to be. In 2015, total import at $1.68 trillion remained the second highest in the world, including increases in soybeans by 14.4% and crude oil by 8.8%, a historic milestone. Outbound direct investment surged to $127.6 billion, an increase by 10%. Outbound tourism registered 120 million visitor-trips, an increase of 12%, with spending overseas reaching one trillion RMB, a 20% increase.

Demographics

China’s demographic dividend is exhausted as the country starts to age. As highlighted in the Goldman Sachs report, the Two-child Policy recently launched cannot arrest the aging trend until a couple of decades later. But China’s development is changing course towards a less-labor-intensive and more innovation driven economy. Less rather than more labor, and quality rather than quantity, now fit the bill. A great deal, of course, depends on education and the prospects for innovation.

Education

China’s spending on education has grown by 20% per year since 1999. Some 7 million university graduates are produced every year. By 2030, China is poised to have some 200 million graduates, more than the entire US current workforce, although most may not be able to measure up to best international standards.

Additionally, China is putting more and more resources on R & D. The country is on track to become the world’s top R&D spender by around 2019, according to an OECD report in late 2014.

Moreover, according to a March 2015 report of ICEF Monitor, a market intelligence resource for the international education industry, 459,800 Chinese students went abroad in 2014, 11.1% increase over the year before. 92% were self-funded. Chinese students are also returning to China to pursue their careers in greater numbers. 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 for the period from 1978 to 2014 stands at 74.5%, thanks in part to an “overseas professional returnees program” with attractive terms. These highly educated returnees are enriching China’s human capital.

Innovation

According to the World Intellectual Property Organization (WIPO), China has been topping the world in the filing of patents and trademarks every year since 2012, responsible for a third of all patents filed. Click here While quantity does not equal quality, these statistics show that China’s education is not all rote learning. Although China still lacks Nobel Laureates, world-class Chinese entrepreneurs are beginning to emerge who are defining the rules of business – Alibaba, Tencent, Xiami, to name just a few. (Edward Tse, China’s Disruptors, Portfolio Penguin, 2015). 

The environment

China has compressed centuries of industrialization into several decades, together with accompanying unbridled pollution. Now the nation has woken up to this existential threat. Hence, China was taking a leading role at the recent Climate Change Paris Summit.

In her Intended Nationally Determined Contribution (INDC) under the COP21 Paris Climate Agreement, China committed, by 2030, - (a) to achieve the peaking of carbon dioxide emissions around 2030 and making best efforts to peak early; (b) to lower CO2 emissions per unit of GDP (emissions intensity) by 60-65% from the 2005 level; (c) to increase the share of non-fossil fuels in primary energy consumption to around 20%; and (d) to increase forest stock volume by around 4.5 billion cubic meters over the 2005 level.  A 20-billion-yuan China South-South Climate Cooperation Fund will be set up to support other developing countries in combatting climate change.    

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. China’s rapidly growing solar and wind capacities will support this system. Clean coal measures, coal caps and coal-free zones are to be introduced while vehicle fuel quality standards are to be enhanced.

According to a Brookings Institution paper of November 2015, China 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 momentum of growth of non-fossil generation capacity over 2010-2014. Solar capacity has 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 has been 73.3% to 455.64 gigawatts in just four years.

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 becoming 85% less energy-intensive, 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 and then peak around 2030.

Conclusion - Walled in?

Arguing that China would inevitably follow the path of Japan’s “lost decades”, the Goldman Sachs report (pp. 56-57) concedes that China has three advantages compared to Japan in the 1990s. First, while China’s debt-to-GDP is very high, it is still lower than Japan’s in 1990. Second, while China’s Total Factor Productivity (TFP) growth rate has dropped from its recent peak of 4%, it remains more than double that of Japan in 1990. Finally, China has a record of implementing significant reforms in the face of almost impossible odds.

China’s reform efforts since the country opened up in 1978 have never been smooth. Few would doubt the scale of challenges in lifting over 600 million people out of abject poverty in 37 years in a country not noted for abundance of natural resources. Dilemmas are plenty to be found. Take, for example, Deng Xiaoping's decision "to let the few get rich first". Or a strategy to favor cities in preference to the countryside. Or going for labor-and-energy-intensive including polluting industries outsourced from the West. Or opening up the country’s economy to gain entry into the World Trade Organization (WTO). A similar dilemma now applies to switching to slower but more innovative and sustainable growth.

Regardless of what seemed impossible odds, successive Five-Year Plans were formulated and delivered, not without difficulties and twists and turns. But warts and all, the results are there for all to see.

As the country of over 1.377 billion people is undergoing seismic changes, there is a great deal of pain and trial and error. These have global repercussions as China is firmly embedded in the world economy. But this doesn’t mean that China is necessarily more “walled in” compared with what she has experienced before. What is more, this doesn’t mean that China’s leadership will roll back reform. Indeed, as evident above, the pangs of a “New Normal” of slower growth belie a new China struggling to be born. China’s new reform agenda will become clear in the soon-to-be-unveiled 13^th Five Year Plan (2016-20).

Do I want to bet against China’s chances of fulfilling the targets in the coming Five Year Plan?  Because this time is different as China is between a rock and a hard place? While I would not vouchsafe for the certainty of success, looking at broken crystal balls betting on “China’s coming collapse” during the past fifteen years, I am hesitant to say that for now, the only path for China is walking hamstrung towards sunset.  

The Great Chinese Slowdown and impact on Britain and rest of the world

My appearance in Hong Kong (18 January, 2016) on News at Ten, a premier news program with ITV, UK's leading TV news channel. 

ITV also ran an overview on the "Great Chinese Slowdown" and its impact on Britain and the rest of the world 

Chief Executive C Y Leung's 2016 Policy Address on CCTV English

On the 2016 Policy Address of the Hong Kong Chief Executive (HK's top leader), I was interviewed on CCTV English anchored in Beijing. 

2016 promises to be a make-or-break year for China

China has opened 2016 with another roaster-coaster market crash. Continuing capital outflow anticipates RMB’s perceived downward slide and risks of slowing growth under the “New Normal”. Although a Goldman Sachs Investment Strategy Group report Download 2016OutlookLastInnings thinks a hard-landing is a negligible probability, growth in 2016 is forecast to range between 5.8% to 6.8%, testing Premier Li Keqiang’s reportedly-suggested 6.5% as the required minimum.

Environmentally, the signs have not been propitious. Beijing sounded the highest possible “red-alert” in December as the city was repeatedly choked by smog.

China’s neighbourhood remains problematic. A landed test flight on reclaimed land in the disputed Spratly Islands in the South China Sea further rattled the United States and its allies. Click here 

However, fixating on China’s travails misses the point. Indeed, these may be considered birth pangs as a new China struggles to be born. Contradictions abound, reminiscent of Charles Dickens' "It's the best of times. It's the worst of times." The old is withering away while the new is sprung upon the unwary across a wide front. Click here

According to Natixis, a French corporate and investment bank, the die is cast for a series of tectonic shifts towards a new China. With the RMB having appreciated by some 50% since 2005, exports such as office machines, footwear, textiles and clothing are plummeting. However, a more expensive RMB will boost the consumer power of a rapidly- expanding urban population. 81 million more urbanites will be added by 2020, pushing the urbanization rate from 54.8% to 60%. Dynamic consumption growth is expected in leisure and other quality-of-life products and services. Industry is likely to be driven more by research-based innovation, particularly in the internet, semi-conductor, robotics, and nuclear energy sectors. Meanwhile, China is becoming a more proactive and outward-looking global player. Backed by new financial institutions like the Asia Infrastructure Investment Bank, China’s One Belt, One Road trans-continental initiative is beginning to take shape.

According to Kevin Rudd, president of the Asia Society Policy Institute in New York, China in 2016 will be preoccupied with preparations for a new leadership team, to be unveiled in the 19^th Party Congress in 2017. Apart from President Xi and Premier Li Keqiang, the rest of the current Politburo Standing Committee Members will have reached retirement age. A proactive and assertive foreign policy is expected to continue in face of Taiwan’s changing political ecology and developments in the South China Sea. Click here

2016 will be a “ground-breaking” year for China to realize the "two-centenary" ambitions. These are to become (a) a moderately well-off country by 2021, the 100th anniversary of the Communist Party of China (CPC) and (b) "a modern socialist country that is prosperous, strong, democratic, culturally advanced and harmonious" by 2049, the 100th anniversary of the founding of the People's Republic of China (PRC). The first aim would be crucial to the second. Click here

Three key "hard-battle" grounds are highlighted. The first is economic restructuring. Ahead of the much-awaited March release of the 13th Five Year Plan (2016-20), Beijing's Central Economic Work Conference has unveiled an economic blueprint, focusing, for the first time, on "supply-side reform". The required structural adjustment includes de-stocking of overcapacity, state-owned enterprise reform, currency and interest rate liberalization, debt and deflation management, old-age healthcare and a greener and more sustainable economy. On the cards are subsidized sales of empty housing to migrant workers and innovative reforms to enhance productivity in finance, natural resources, manpower, equipment and technologies.  Click here

Another "hard battle" ground is the eradication of poverty. Notwithstanding rising affluence, some 250 million Chinese (18% of the population) still subsist on less than $2 dollars a day. Gross economic inequality remains a threat to the CPC's legitimacy as a governing Party.   

The third "hard battle" ground is military transformation. This aims to reduce the size of the People's Liberation Army (PLA) by 300,000 strong and to revamp the entire operational and strategic command structures spanning the Military Commission, PLA regions and strategic units. It is designed to shape capabilities to fight and win warfare in the 21st century, including information and space warfare . Central to this "hard battle" is the ongoing anti-corruption campaign covering the military. 

These mammoth tasks presage a struggling transition in 2016 as the Chinese juggernaut’s about-turn continues to make waves in economic, social, financial and geopolitical spheres.

Perhaps the most challenging transition is towards a freer, more open and just society where the rule of law, rather than "rule by law", will be upheld. One of the key essentials is to subject the Party to check and balance held to public account. A crucial component is an autonomous or "independent" judiciary. Already, measures are in hand to transfer the power of judicial appointments to the provincial level. There are also moves to introduce a system of "circuit courts". Huge problems remain, including the lack of professional judges and the whole bureaucratic culture of a one-Party state.

Meanwhile, a new domain of opportunities is appearing on the micro-economic and business horizon, including innovative manufacturing, agricultural imports, wealth management services, green and quality-of-life businesses, movie entertainment, both online and offline, and football, according to a McKinsey report.  

Following the Paris COP21 Climate Summit, dynamics are in place which augur well for a more ecologically-balanced China. A new Air Pollution Prevention and Control Law came into effect on 1^st January. This has incorporated planning mechanisms in the US State Implementation Plan and the UK’s Local Air Quality Management program. Laggard cities are now held accountable for targets with public inputs and monitoring. Stringent measures are being introduced to curb coal usage, including caps and coal-free zones. While lip-service and slack enforcement remain huge obstacles, the Environmental Protection Law effective 1^st January 2015 mandates accumulative fines and holds local governments to account. Indeed, party secretaries’ career credentials are being judged on how well they perform in helping to create a more harmonious and greener China. Click here and here

How China evolves is bound to modify the world order, for better or worse. As Henry Kissinger observes*, history is to be discovered, not declared. Indeed, China’s transition in 2016 and beyond opens up a whole new vista of Olympian competition and win-win partnership in helping shape a Rising China.  As cautioned by President Xi Jinping, misgivings notwithstanding**, the "Thucydides Trap" engulfing rival great powers doesn’t have to be sprung.

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*World Order – Reflections on the Character of Nations and the Course of History, Henry Kissinger, Penguin Books, 2015, p. 374, last paragraph

**The Improbable War – China, The United States and the Logic of Great Power Conflict, Christopher Coker, Hurst and Company, London, 2015

China in 2016

China 2016 is likely to be characterized by a host of contradictions, perhaps best described by Charles Dickens' "It's the best of times. It's the worst of times." The old is withering away while the new is sprung upon the unwary.

A slowing China with a roller-coaster stock market appears now the New Normal. Notwithstanding recurrent predictions of a hard-landing, if not total collapse, Goldman Sachs January 2016 Investment Strategy Group Report maintains a sober assessment. Growth in 2016 is expected in the range of 5.8% to 6.8%. But a hard-landing is considered a negligible probability.  Download 2016OutlookLastInnings

A reforming China is likely to remain a massive and rapidly-changing work-in-progress. A great deal of challenges persists. Indeed, much of China's current travails in the financial market may be considered the birth pangs of a New China.  Download A Slowing China - Deepening Malaise or Birth Pangs of a New China

Kevin Rudd, 26th Prime Minister of Australia and president of the Asia Society Policy Institute in New York, writes in the Time Magazine online (21 December, 2015) offering his read on China's priorities in 2016.

Meanwhile, ahead of the much-awaited March release of the 13th Five Year Plan (2016-20), Beijing's Central Economic Work Conference has unveiled an economic blueprint for the coming year, focusing, for the first time, on "supply-side reform". This translates into streamlining bureaucracy and eliminating excess capacity e.g. through subsidized sales of empty housing to migrant workers from rural areas. It also means structural reforms to enhance productivity in areas including finance and resources such as land and materials as well as manpower, equipment and technologies.  

Economic restructuring is one of the three key "hard-battle" grounds (for which 2016 will be a "ground-breaking year") to realize China's "two-centenary" ambitions. These are - (a) to become a moderately well-off country by 2021, the 100th anniversary of the Communist Party of China (CPC) and (b) to become "a modern socialist country that is prosperous, strong, democratic, culturally advanced and harmonious", by 2049, the 100th anniversary of the founding of the People's Republic of China (PRC). The first aim would be crucial to the achievement of the second. Click here

Another "hard battle" ground is the eradication of poverty. Notwithstanding China's breakneck economic growth and rapid income rises, some 250 million Chinese (or 18% of the population) still subsist with less than $2 dollars a day. Gross economic inequality remains a threat to the CPC's legitmacy as a governing Party.   

The third "hard battle" ground is military transformation. Apart from reducing the size of the People's Liberation Army (PLA) by 300,000 strong, this aims to completely modernize the entire military forces, streamlining the strategic command and operational structures between the Military Commission, military regions and strategic military units, and shaping the military's capabilities to fight and win warfare in the 21st century, including information and space warfare. Central to this "hard battle" is the ongoing anti-corruption campaign covering the military. 

2016 is likely to witness a struggling transition to a New China. The defining dynamics and data are expounded upon in an in-depth report by The Beijing Axis - The China Compass - in October 2015. However, this report omits coverage of perhaps the most critical area of China's transition, that towards a freer, more open and just society where the rule of law, rather than mere "rule by law", is upheld. One of the key essentials, apart from a Party subject to check and balance held to public account, is a more autonomous, or "independent" judiciary.

Suffice to say that the Party is alive to this challenge. Measures have been introduced to transfer the power of judicial appointments to the provincial level. There are also moves to introduce a system of "circuit courts". Huge problems remain, including the lack of professional judges. Nevertheless, a step forward, however limited, is far better than standing still, let alone rolling backwards.  

On the micro-economics and business side, a report by Gordon Orr, director emeritus of McKinsey, What might happen to China in 2016, expounds on the socioeconomic dynamics such as slower growth, re-centralization, fewer jobs, quality of life goals, greener economy, wealth management, innovative manufacturing, massive agricultural imports, spread of satellite towns, explosive growth in movie entertainment, both online and offline, and interestingly, football. 

However 2016 may turn out for China, it is unlikely to be anything but eventful. 

President Xi's 2016 New Year Speech

Dialogue, a CCTV News (English Channel) panel discussion, focuses on President Xi's 2016 New Year Speech which outlined the nation's direction for the coming year. I appeared as a overseas guest on the panel on the question of China's anti-corruption campaign, including the financial sector. The panel later discussed the newly introduced Two-Child Policy. 

COP 21 Paris Accord promises to save the world

Considered perhaps a long-overdue healing but not a cure, the historic Paris Accord at least half-opens a shut door to a global low-carbon future. It's an apt Christmas Gift to the Planet. It's a clear signal to both developed and developing nations alike that more of the same is no option. As one of the slogans says, there is NO PLANET B.

The Paris Accord is legally binding on all 195 signatories (subject to ratification). However, it is based on differentiated Intended Nationally Determined Contributions (INDC) of which enforcement is no more than naming and shaming. Now all the Parties have committed themselves to this regime. 

President Obama ably summarized America's leadership in this global trajectory. He mentioned the US historic agreement with China at the outset which helped bridge differences between developed and developing countries. As a result, there were already 128 INDCs on the eve of COP21. Now, there are 186 INDCs. 

China taking a leading role at COP21 is informed by the nation's imperative of striving for green growth. Indeed, the momentum driving the positive outcome would not have happened without China coming on board, according to the New York Times. 

Above all, geopolitics and geo-economics will never be the same again. Good news for green energy countries and businesses. Bad news for oil and gas "hegemons". The latter include countries like Saudi Arabia and Russia. A preliminary analysis in the New York Times shows how. 

The game-changing dynamics are examined in detail in a Baker & McKenzie 26-page Overview in January, 2016, including "internationally transferred mitigation outcomes" (ITMO), Reducing Emissions from Deforestation and Forest Degradation (REDD+) with forest conservation, Climate Finance, Adaptation, Technology Transfer, Capacity Building, and Implementation. 

Download Baker & McKenzie Report COP21 Overview

The report throws light on the confusing question on the extent to which the Paris Agreement is legally binding. The following extract is instructive -

"The reason for this confusion is that the NDCs, the substantive plans on how countries will achieve the well-below 2°C  target, are not part of the Agreement themselves (instead they are submitted to a UNFCCC registry).  The only aspects of Agreement which compel a state party to action (i.e. those articles denoted by the word "shall" rather than "should") are those which relate to obligations to share their NDCs at 5 year intervals for inclusion in a public registry. Additionally, developed countries are bound to provide climate finance to support developing countries and report on that finance every two years. Aside from these procedural points, there are no hard obligations on the Parties".

But legally binding or not, the momentum behind the Nationally Determined Contributions (NDCs) has created a global irreversible trend towards cleaner and greener world. The tectonic shifts will manifest themselves in the fossil fuel sector, as noted in the McKenzie Overview - 

"The point was very clearly made at the COP by the Bank of England Governor who stated that under a 2°C carbon goal the "vast majority of reserves" of oil, gas and coal would become stranded. Indeed, measures such as the proposed OECD limitation on export financing for new coal assets would deal a significant blow to the coal sector. The Paris Agreement has simply reinforced this trend with post COP in share price  The Paris Agreement movements downwards and upwards for fossil fuel and clean energy stocks respectively."

The Age of Oil is doomed to end sooner rather than later. After all, the Age of Stone ended, not for lack of stones.