There are some straws in the wind indicating that the relatively strong economic growth shown in official figures for the first two months of this year may not be quite what it is made out to be, but politics will prevent the authorities from allowing any real weaknesses to show up in what will be reported in the coming months. Chinese statistics often make one scratch one’s head even when all is going well and there is no obvious incentive to cook the books. This year is a politically critical one – leading up to a Communist Party congress in the Fall that will name the country’s leaders for the next five years – and President Xi Jinping will undoubtedly want to make sure that there is nothing overshadowing the record of his stewardship.
He faces no real challenger, since he has used anti-graft and other disciplinary campaigns to eliminate rivals and promote loyalists. Just last month, he shook up his economic team, replacing the retiring top banking regulator, the Commerce Minister and the highest-raking economic planning official with close associates. Even the country’s No. 2 leader, Premier Li Keqiang, concluded a press conference this month with the words “see you again, if there’s a chance,” suggesting that a second five-year term for him is not a sure thing. Still, Pres. Xi will want to make certain that any unwelcome developments are avoided in the economic as well as political arena, and that those that do occur are not widely reported.
Efforts to keep the yuan’s exchange rate on a reasonably steady course are important in this context, also to dissuade Washington from taking disagreeable steps, but they are not being made any easier by the US Federal Reserve’s plans to continue ratcheting up interest rates. There are some signs that capital controls clamped on by the authorities – to wit, curbs on Chinese companies seeking to invest overseas, restrictions on converting yuan into other currencies and a crackdown on underground banks often used to evade controls to move money offshore – are having some effect. Also, the People’s Bank of China has begun to use forward contracts and futures to influence the exchange rate without having to shell out money from the official hard-currency reserves. Withal, the renminbi, while showing more volatility than in the past, is not likely to stay on the persistent downtrend that has taken it 4.7% lower against the dollar in 2015 and another 6.9% in 2016. But Beijing’s dream of turning the yuan into a global currency rivaling the greenback has been set back a great deal. Last year, the value of international payments in renminbi plunged by 29.5% compared to 2015. In the near term, this trend will not be turned around, even though the PBOC has succeeded in keeping official FX reserves above USD 3 trillion (the largest in the world).
The economy is said to have grown by a real 6.7% in 2016, as planned, and at a yearly clip of 6.8% in the final quarter. It assertedly made a solid start to 2017 in January and February, which statistically are usually taken together to iron out distortions caused by the Lunar New Year holiday. But Premier Li, in setting out the target for the current year, allowed a note of caution to slip in when he talked of “about 6.5%” rather than the firm 5.5%-7.0% range that had been predicted for 2017. And there are, indeed, signs that this caution is not unjustified. The Northeastern industrial province of Liaoning, for instance, reported a 23% drop in nominal economic output for 2016, which hints at the extent to which activity in the Chinese rustbelt had previously been exaggerated. The much-trumpeted progress the country has made in paring back the bloated steel industry looks grossly overstated. In fact, excess capacity continues to weigh on much of the industrial complex, from mining and metals to glass and cement.
Wages in manufacturing have been pushing upwards and have, on the average, already jumped above those in countries such as Brazil and Mexico. They are, in fact, higher than in every Latin American nation save for Chile and are within shouting distance of those in weaker European countries such as Greece and Portugal. Even so, retail sales are not doing nearly as well as the authorities had hoped and the momentum the economy has been gaining from massive infrastructure spending and a super-easy monetary policy will fade as the year progresses. While a flood of credit and fiscal stimulus helped in 2016 to keep factories humming and construction sites crowded, there is now growing concern in official circles about asset bubbles and rising debt. Whereas rising prices have been bolstering corporate profits and have eased debt burdens, annual consumer price inflation in February was measured at a mere 0.8%. Infrastructure spending is delivering progressively less growth, given inefficiencies in government and a much-shrunken pool of good projects.
With the approach of the Party congress later this year there will be a premium on avoiding risk in official circles and the government will continue to be very cautious as it seeks to trim the ballooned industrial sector to mop up red ink. I would be very surprised if it did not continue to bail out large state firms in trouble, since Beijing does not want to provoke a crisis. But it will keep up efforts to weed out a limited number of smaller, heavily indebted “zombie” companies. Last year, Chinese courts accepted 5,665 bankruptcy cases. Reports have it that 3,600 of these have been resolved and that 85% of the resolved ones resulted in liquidation. Between 2008 and 2015, not quite 20,000 cases were accepted by the courts and it is a fair assumption that for every one of them another couple of hundred enterprises went out of business (according to the IMF mostly via deregistration and the cancellation of business licenses). The time frame under review is significant because it was in 2007 that the legislature in Beijing approved a modern bankruptcy law. But even today debt disputes are still often handled through backroom negotiations, since local officials tend to be much more worried about the prospect of creating unemployment than about attracting the wrath of creditors.
Global Perspectives by Dr. Hans Belcsak