The above topic is the subject of a January 2017 China Financial newsletter of Global Source Partners, a consultancy. The author, Michael Pettis, highlights the overarching importance of the looming Party Congress scheduled for end 2017, its impact on China's intractable reforms, nature of growth, and debt restructuring.
Download Global Source Partners - The Politics Of China's Economy
I have the following take –
Debt
While China’s debt problem is serious, it is not systemically threatening as the nature and composition of debt are not on all fours with Western comparisons. This is explained in detail in my analytical overview.
In sum, much of the debt is incurred by non-financial corporations, including state-owned enterprises, which re-deposit a great deal of such loans into the banking system. China has an exceptionally high level of corporate deposit holding, equivalent to 90% of GDP, compared with 7% of GDP in the United States. Albeit a sign of low efficiency of capital utilization, loans are often recycled back to the lending bank as deposits. Nevertheless, this enables the banks to earn high interest spreads and acts as a cushion against exigencies.
According to the People’s Bank of China, at the end of 2014, total bank deposits amounted to some US$19 trillion while total loan book stood at US$14 trillion. 45% of the bank deposits came from personal savings while 50% came from enterprises.
Household debt is only 38% of GDP. Gearing remains relatively low both in owner-occupied housing and consumption.
SMEs generally struggle to obtain adequate loans from the main banks. Their activities are largely (albeit not exclusively) financed from private sources.
So the perceived burden of any debt losses falling on households and SMEs is not well substantiated.
New anti-corruption Supervisory Commission
This is a ground-breaking move to establish a more “independent” anti-corruption institution, modeled on Hong Kong’s Independent Commission Against Corruption with a three-pronged attack - enforcement, prevention and education – underpinned by the rule of law. Click here
While the rule of law in China still lacks a truly independent judiciary, this unprecedented move is likely to strengthen President Xi’s hand in tackling the still strong reactionary forces which have retarded much of his structural reform initiatives.
What is more, this will serve to strengthen President Xi's expected final showdown with the Jiang Zemin clique, reportedly allied to the fallen “political conspirators” publicly named by him – Zhou Yongkang, Bo Xilai, Guo Boxiong, and Ling Jihua . This clique represents the strongest “vested interests” resisting Xi’s sweeping house-cleaning reforms, which are designed to restore the legitimacy and leadership of a Communist Party rotten to the core. Click here
The final curtain is likely to be drawn on this existential power-struggle where Xi seems now to have a full grip. Much will be revealed in the 19th Party Congress by late autumn this year. This is set to usher in a new leadership line-up under President Xi.
Growth in 2017 and the RMB
I had the following to say in my forecast for 2017 –
The problem of the Renminbi is now compounded by the rising strength of the greenback, to which the Chinese currency is informally linked. The expectant further weakening of the Renminbi has prompted huge currency outflow through various proxy channels, exacerbating the currency’s fall, despite the People’s Bank of China’s intervention to prop it up. With the coming Trump Presidency, this is likely to fuel accusations, however unjustified, of currency manipulation to drive down the Renminbi to gain unfair trading advantage.
So much is at stake that a nationwide campaign is mounted (a) to eliminate excess capacity, surplus housing stock, and financial leveraging, (b) to lower costs, and (c) to address various deficiencies including loss of employment due to restructuring. (三去一降一补) To boost long-term productivity, a “Made in China 2025” government initiative has been incorporated in the latest five-year plan to transform the country’s manufacturing industries into “Ten Trillion Yuan” pillars in digital technology, biotechnology, green and low-carbon economy, high-end equipment and materials, as well as creative businesses.
Whether China succeeds in these restructuring challenges will determine whether she can overcome the classic “middle-income trap” to rise to the next level of development. Much of the dynamics will unfold with a new leadership lineup in the autumn 19th Party Congress.
According to the IMF (2016), China contributed 1.2% to global GDP growth, compared with the US share of 0.3% and Europe’s 0.2%. For 2017, China is expected to contribute 1%.
China’s economy has been restructuring quite significantly. In 2016, export contributed to only 20% of GDP, only marginally more than India. Services account for 51% of GDP, up from 44% in 2011. According to China’s Bureau of Statistics, while still accounting for a much lower proportion of the economy compared with advanced countries, consumption contributed 64.4% to China’s growth, ahead of investment’s contribution at 42.2%. 73% of economic growth in the first six months of 2016 was from consumption.
What is more, Jack Ma's apparent rapport with President Trump showing how the United States could create a million American jobs by selling American goods and services to China and the rest of Asia on Alibaba's e-commerce platform speaks volumes on the changing dynamics of China's economy.
In any event, compared with 82% of Mexico’s exports going to the United States, Chinese export’s US exposure is only 19%. China’s economy has therefor become much more globalized and relatively less US dependent, thereby better able to withstand pressures should a trade war breaks out under Trump's administration.
