FEATURE: In high gear
SYDNEY (China Daily/ANN) - The Chinese economy, now focused on quality growth, has played a substantial role in the global turnaround
Just over a decade since the global financial crisis sent economies and financial markets into a tailspin, 2018 could mark the year in which the corner has finally been turned as China shifts focus from quantity to quality growth.
Going forward, high-quality development such as robotics and artificial intelligence (AI) will be the major theme of China’s economic policies, rather than mass-produced manufacturing which has stimulated much of Asia’s economic development.
“Clearly, China has shifted its focus from quantity of growth to quality of growth,” said Tommy Xie, economist and vice-president for global treasury research and strategy with Singapore-based OCBC Bank.
Xie noted that the statement from the Dec 18-20 Central Economic Work Conference, which sets the tone for China’s economic policies, does not mention the word ‘leverage’, although it was mentioned five times in the 2016 statement.
“This shows Chinese leaders are comfortable with the current progress of deleveraging. Chinese leaders including People’s Bank of China Governor Zhou Xiaochuan have mentioned publicly in the past few months that China’s total leverage ratio has started to decline.”
Xie said perhaps the most important thing to come out of the meeting is that China has “broken the conceptual ‘deleverage’ into details” in its December statement.
He said China is expected to step up its deleveraging campaign in four areas in 2018, including local government debt, control of money supply, dealing with zombie companies, and establishing a long-term mechanism for the property market.
How will the world benefit from China’s economic policy in 2018?
Xie said although it is too early to conclude that China will fill the gap left by the United States’ retreat from global leadership, “the latest statement from the Central Economic Work Conference clearly specifies that China is ready to lead the next phase of globalization via boosting consumption and further openness”.
For the past 10 years, China has been the pivot the global economy has looked to for economic growth.
Antonio Fatas, a professor of economics at graduate business school INSEAD in Singapore, said the global economy slowly improved its outlook in 2017 through a combination of a recovery from the global financial crisis and the fact that “potential risks have not materialized”.
Speaking to China Daily Asia Weekly, he said the Donald Trump administration in the US has not yet caused “an economic or political crisis”, while “emerging (Asian) markets have dealt well with the weakness of 2014/15 and the potential risks of increasing interest rates in the US”.
Europe has also avoided a major political crisis, he added.
“You put all of this together and you see that all engines of the world economy are working. Asia is a reflection of what is happening in the world.”
Leon Perera, CEO of Spire Research and Consulting, said a number of factors are contributing to the improved global economic picture.
Apart from China’s continued growth, he singled out the slashing of the US corporate tax rate — from 35 per cent to 21 per cent when fully implemented, making it one of the lowest in the developed world — and the continued success of Japan’s economic reforms under Prime Minister Shinzo Abe.
“Above all, leading global companies continue to sit on reserves of cash (and the ability to borrow even more), waiting for the right conditions to be invested,” he said.
Most analysts agree, however, that attention will be on China as it focuses more on the quality of growth.
Perera said disruptive technologies like AI and drones will continue to create jobs in new sectors to compensate for the traditional jobs eliminated, “though there will be global winners and losers depending on how fast countries and companies can adapt”.
He Tianjie, an economist with Oxford Economics in Hong Kong, said the biggest surprise last year was the strong recovery in world trade growth.
“(It was) initially kick-started by China in mid-2016, but since the start of 2017 the export recovery has been geographically quite broad-based,” she said.
“The positive demand shock lifted factory output (and) commodity prices, boosted investment expenditure and triggered robust synchronised growth in all major economies — from small, open Asian economies to commodity exporters and other advanced economies.
“China’s import surge since mid-2016 was initially a major impetus to the global trade recovery — as stronger Chinese demand directly contributed to the upturn in world trade, while also boosting imports indirectly in other economies such as highly trade-oriented Asian countries like South Korea.”
She said trade spillovers lead to rising investment, supporting the recovery in global growth.
“Following China’s move to cut overcapacity and tackle its pollution problem, there has been some impact on the industrial sector, particularly rising costs and product prices,” He said. “PPI (the producer price index) held up better than expected (in 2017), mainly driven by price increases in mining and heavy industries.”
Another factor in 2017 was Beijing stepping up its efforts to rein in financial risks, with tightening of financial policies leading to higher market interest rates and equity market weakness. Latest monthly data show that real estate and infrastructure investment has decelerated.
Rob Subbaraman, chief economist for Asia ex-Japan with financial services group Nomura, said China’s increasing focus on quality growth “will lead us to what we see as a new theme — credit risk differentiation — as China bites the bullet and starts the more painful reforms of corporate restructuring and deleveraging, while upholding a tougher regulatory regime, including stringent macro prudential measures to avoid new asset price bubbles”.
“The economy appears to have started slowing again in response to rising funding costs and a cooling property market, but the silver lining is that the economy is rebalancing from a model driven by exports, heavy industry investment and SOEs (State-owned enterprises) to one driven more by consumption, services and innovative private enterprise,” Subbaraman said in Nomura’s Asia Economic Outlook report.
He said Xi Jinping’s re-election as the top leader of the Communist Party of China for a second five-year term, has resolved China’s “time-inconsistency” problem.
“Xi spent his first five years cracking down on corruption and vested interests, and now has the power and farsightedness to tolerate short-term pain for long-term gain … solid sustainable growth with a reduced risk of a financial crisis.”
Seck Tan, assistant professor at the Singapore Institute of Technology and adjunct assistant professor at the Lee Kuan Yew School of Public Policy, said the Chinese economy has played a substantial role in the global turnaround.
“Firstly, its appetite for commodities drives its energy-heavy industries. Secondly, strong demand for consumables (has been created) by its growing middle- to upper-class population,” he said.
“Although the Chinese economy is anticipated to slow by about 0.5 per cent in 2018, it will continue to (generate) demand for commodities and consumables in order to sustain its employment numbers,” Tan said.
He said dynamic challenges facing the world this year include energy and food security, political stability and economic growth, and environmental sustainability.
“To date, growth of the Chinese economy has been fueled by debt — this is justified in the early stages of development,” Tan said.
“For development to be sustainable, alternative means must be sought from low carbon technology for economic growth and ease of access to consumables for domestic consumption.
“The manufacturing sector could adopt low carbon technology with the aid of subsidies in the transition phase. Further cuts to import tariffs on premium consumables aimed at the growing middle class would be favorable for domestic consumption.”
Qu Hongbin, HSBC’s chief economist for China, said China’s economy last year surprised many observers, growing at 6.9 per cent in the first three quarters.
“We expect the momentum to carry into 2018, supported by continued manufacturing recovery and stable exports, which should offset some of the headwinds from the housing market slowdown and SOE restructuring,” he wrote in the bank’s outlook for this year.
HSBC sees real GDP growth for China at 6.7 per cent year-on-year in 2018, which is above the consensus forecast of 6.4 per cent.
Singapore-based DBS Bank in its outlook for China said 2018 will “mark the very first year of a new era that is under the tight control of Xi’s team. While they have big plans, the challenges are equally immense.”
“All decisions to be made by Xi will easily be endorsed by the Standing Committee and the Politburo. Thus, it is fair to assume execution of economic policy will be faster, particularly in the fiscal space pertaining to urbanisation and those related to the Belt and Road Initiative” — the China-led plan for a trade and infrastructure network that revives the ancient Silk Road routes.
“The likelihood of State-driven investment becoming the prime economic growth driver in 2018 and beyond is high,” DBS said.