CHINAwatch

Beijing doubles down on financial reforms as domestic and external situations ease

The above 經濟向好外憂暫緩 中央密集推出改革 is the subject of an editorial of Ming Pao Daily News 明報新聞 of 24 April, 2017. 

The editorial points out that with lowering non-performing loans, easing money outflows, greater exchange rate stability, rebounding business profits, and improved relations with the Trump administration, Beijing is doubling down on financial reforms, including personal tax relief, debt de-leveraging, money-market discipline, and shadow banking regulation.

Download 經濟向好外憂暫緩 中央密集推出改革  

Economic Cooperation in the Greater Bay Area

Guest appearance on 21 April with Back Chat, a Radio Hong Kong news and public affairs program. 

(Slide the time counter in the Full Version to 19:30, 40:43 and 47:06 for starts of my conversations) 

The opportunities of the Greater Bay Area plan will be boosted in the context of China's One Belt, One Road initiative. Click here. The anchors referred a few times to the suggestion that the plan could be Hong Kong's "last chance" to shore up its declining competitiveness.

At the end of the program, I was asked what Hong Kong would be like 20 years from now. There is little doubt that Hong Kong would be even more deeply integrated with the Mainland economy.

But I forgot to mention that in 2037, ten years before the constitutional expiry of the One Country, Two Systems formula, if Hong Kong gets it right, so that the formula becomes a huge China advantage, instead of a burden, there is every reason to believe that China would want to renew the formula for say, another 30 or 50 years! As in the case of the 1997 Handover, a decision on Hong Kong's long-term future would have to be made at least a decade in advance to forestall any capital and people flight. 

If Hong Kong's future beyond 2047 is renewed, that would be a great boon to the people of Hong Kong. At the very least, that would take the wind out of the sail of so-called Hong Kong "self-determination" or "independence" driven partly by young activists unsure of their future. 

US sends aircraft carrier strike group to Korean Peninsula

Live TV interview  on 9 April, 2017 with RT International, a global news network based in Moscow with 700 million viewers worldwide. 

Three Years of China’s New Silk Roads: From Words to (Re)action?

A stock-taking report dated February 2017 by ifri (Institut français des relations internationales - French Institute of International Relations), a Paris-based think-tank, describes how the One Belt, One Road (OBOR) initiative is beginning to take shape across continents, including East Africa, Central Asia, and Eurasia, albeit mainly in the form of energy, power, transport and other infrastructural projects, including those financed by the China-led Asian Infrastructure Investment Bank (AIIB). The report points out that there are far-reaching geopolitical implications pointing to more China-centric international relations. It concludes by saying that this space continues to need watching. Download Ekman_et_al_china_new_silk_roads_2017 

Meanwhile, the first freight train to run from Britain to China departed on 10 April, carrying goods like vitamins, baby products and pharmaceuticals, according to a Reuters report. The 7,500-mile (12,000 km) journey from eastern England to eastern China will take three weeks, around half the time needed for the equivalent journey by boat. The first freight train from China arrived in Britain in January. From Barking, the new train will pass through the Channel Tunnel into France and on to Belgium, Germany, Poland, Belarus, Russia and Kazakhstan before ending up in Yiwu in China.

A parallel development not touched in the above Report is the Pearl River Delta Greater Bay Area vision endorsed at the "Two Sessions" in Beijing in March 2017. This emerging super- megapolis to encompass Hong Kong, Shenzhen, Macao, Guangzhou, and Zhuhai is likely to be a home-based economic, innovation, manufacturing, financial and entertainment dynamo poised to drive at least the initial part of the "maritime silk road" development. 

 

China's Supply-side Structural Reforms 2017 - some progress but remains government-driven

The Economist Intelligence Unit (EIU) issues its 2017 stock-taking report on China's Supply-Side Structural Reforms (SSSR).  

Download China's Supply-Side StructuraL Reform

According to the Report, "SSSR is meant to wean the economy off its dependence on stimulus, helping to drive growth by unleashing latent productivity. It aims to curtail supply in some areas, while making adjustments in regulations and markets to incentivize companies to invest more in producing what is actually in
demand".

"The 2015 Central Economic Work Conference (CEWC) identified five areas of focus under SSSR, known in Chinese as the “three cuts, one reduction, one strengthening” (三去一降一补):

1. Cutting (industrial) overcapacity
2. De-stocking (property inventory)
3. Corporate deleveraging
4. Lowering corporate costs
5. Improving “weak links"

Following are its conclusions (extracts)  - 

"Overall, the government can look back on the first year of SSSR with a degree of satisfaction. Overcapacity was reduced in the steel and coal sectors. Unsold property inventory fell for the first time in several years. A rise in inflation helped to ease debt-servicing strains for firms. VAT reform was completed. The "Made in China 2025" (MiC) programme was rolled out further under improving “weak links”.

"Headline excess capacity cuts were less impressive than they appear, as they included a significant portion of already-idle capacity. Property inventory fell, but only slightly, and there was little progress in coaxing buyers into third- and fourth-tier markets. .... broader deleveraging plans—such as debt-for-equity swaps— do not convince. ... while plans to reduce Corporate Income Tax (CIT) did not move significantly forwards".

"Overall, progress in 2016 on implementing the main policies of SSSR by 2020 ranks as follows - 

(1=fastest, 5=slowest)

1. Cutting (industrial) overcapacity 
2. Destocking (property inventory) 
3. (Corporate) deleveraging 
4. Improving “weak links” 
5. Lowering corporate costs"

"In the period to 2020, however, we expect progress across these areas to shift. We are relatively optimistic on the prospects for a reduction in corporate costs ....
via slashing government fees even without adjusting CIT".

"Moving the industrial economy up the value chain is a process well under way, and the financing available under MiC 2025 and the widening capabilities of domestic private-sector technology firms ought to help to sustain it".

"Overcapacity cuts will become much harder as they extend into areas of productive capacity, especially in the SOE sector, which will have a greater bearing on economic growth and the labour market. Restructuring funds set up by the government to help to facilitate the process are not substantive and are also being poorly deployed".

"Curbing credit supply to overcapacity sectors, alongside other aspects of the deleveraging programme, will help to slow the pace of debt accumulation. But we doubt that reforms in the SOE sector will be ambitious enough to help the sector to grow out of its debt".

"We are least optimistic about prospects for destocking housing inventory. Curbing property supply will run contrary to the interests of local governments, especially given that a potentially revenue offsetting property tax is unlikely to come into force before 2020".

"Concerns about the trajectory of the market will make investors and buyers wary of acquiring third- and fourth-tier assets, while reforms to the hukou system and land ownership are not proceeding fast enough to stimulate real demand among migrant workers".

"The drive against overcapacity, for example, has been driven by government fiat rather than by economic logic. Deleveraging is being fashioned not through the broad-brush strokes of monetary policy, but via selective programmes shaped by the authorities".  

"The MiC 2025 programme makes clear that the government will stay involved in picking industrial winners and losers. Many of the major economic developments in 2016, such as soaring coal and housing prices, were tied directly to the programme. It  is set to be an important force shaping commodity prices, infrastructure investment, SOE profitability and property prices, among other areas, in the years to come."

Despite scepticism, the Pearl River Delta Greater Bay Area vision will drive China's One Belt, One Road

Hong Kong's business response to the One Belt, One Road initiative has so far remained guarded. At this stage, most see this as Beijing government mantra and if anything, largely confined to physical infrastructure. My views are included in a South China Morning Post (SCMP) Special Report of 28 March. Click here. There are also geopolitical considerations. Click here

What hasn't been done justice in the SCMP report is my brief reference to the vast opportunities presented by the Pearl River Delta Greater Bay Area vision. This vision has recently been endorsed in the Two Sessions of the National People's Congress and the Chinese People's Political Consultative Conference (NPC/CPPCC) in March, 2017.

The five existing bay area economies around the world, comprising cities and related infrastructure clustering around New York, San Francisco, London, Tokyo and Sydney, already account for some 60% of the world's economy. The Pearl River Delta Area has now overtaken Tokyo as the world's largest mega-city, according to a report in The Guardian.

Under a plan endorsed in the Two Session, Click here the nine dynamic cities of Shenzhen, Guangzhou, Foshan, Dongguan, Huizhou, Zhongshan, Zhaoqing and Jiangmen are to be further integrated with the economies of Hong Kong and Macao. Click here The strategy envisages Hong Kong as the Greater Bay Area's financial center, Shenzhen its e-tech center, Guangzhou its high-tech manufacturing center and Macao its entertainment and gaming center. 

Immense political, legal, and socio-economic barriers between Hong Kong and the other cities have to be overcome if this Greater Bay Area vision is to come to fruition. Nevertheless, the economies of the various city clusters in the Pearl River Delta, Hong Kong included, are already highly integrated. The Hong Kong-Zhuhai - Macao Bridge expected to be completed by end 2017, and the Guangzhou-Shenzhen-Hong Kong Express Rail Link, expected to be completed by end 2018, will bring the various economies even much closer together.

For a start, this closer economic integration is set to alleviate Hong Kong's tight land supply for businesses. Click here As the Pearl River Delta Greater Bay Area economy pulls its weight together, it is set to become an economic dynamo driving the Maritime Silk Road component of the One Belt, One Road initiative. 

Initial scepticism notwithstanding, both the Great Bay Area vision and the One Belt, One Road initiative are part and parcel of a globalized world characterized by cross-border inter-connected and inter-dependent value chains, where the flow of capital, goods, services and information knows no boundaries, a world where cities don't function in isolation but in synergistic clusters, and a world increasingly connected by regional and transnational infrastructural links (or Connectography). It is this global connectivity, empowered by technological innovation, digitization and the internet, that informs the arrival of the Fourth Industrial Revolution.