China

By Carlos Mera, Rabobank

As the world grapples with major economic and geo-political changes, we have predicted that food prices – which like all commodities are influenced by such forces – will remain low during 2017.

We believe the fundamentals support that view: while the spectre of inflation stalks some economies, stock levels of food commodities are at record levels, applying some downward pressure to prices. Many of these reserves are held by China. Therefore, what action the world’s most populous country takes in 2017 will have profound repercussions for everybody else. Read more

Donald Trump won the US election on a promise to ‘make America great again’. Now he is in the Oval Office, he will actually have to make good on those promises. He will need to create new jobs and improve living standards for America’s ‘left-behind’ who turned out en masse to vote him in. Trump appears to believe that the quickest way to achieve this is by revamping and restructuring the US’s global economic relationships, particularly with China.

Inevitably, such an upheaval will cause geopolitical tensions and Britain must be careful not to get sucked into a vortex of trade warfare. However, if we play our cards right, the process could provide a fantastic global opportunity for the UK. Read more

By Paola Subacchi, Chatham House

The few weeks between the beginning of 2017 and the Chinese new year may be used by the Chinese monetary authorities to tweak some policies. The exchange rate is an area in desperate need of reform.

Will China finally embrace the market and let the renminbi float?

Despite the ambition to turn it into an international currency – i.e. a currency used to invoice and settle international trade, and to be held as an asset – the renminbi remains a currency with limited international demand. Read more

A month before his official inauguration, Donald Trump is already tossing diplomatic grenades in China’s direction. It is a sign of things to come. 2017 is shaping up to be a highly eventful, taut and precarious year for China-US relations. This is partly due to a simple scheduling coincidence.

2017 will be the first time ever when both the US and the PRC in the same year will usher in new governments. The US will kick things off on January 20th by swearing in Donald Trump as President. China, meanwhile, will undertake its own large political upheaval, its five-yearly change in political leadership, culminating in the 19th Communist Party Congress sometime late in the year. Virtually the entire government hierarchy, from local mayors on up, will be changed in a monumental job-swapping exercise orchestrated by Xi Jinping, China’s president. Read more

For two decades China’s economy – second in size only to that of the US – roared ahead at annual double-digit rates of growth. This year, according to official data, it is growing at 6.7 per cent. The current rate would be significantly less were it not for the continued willingness of China’s authorities to pump increasing amounts of cash into overheated real estate, financial and state owned enterprise sectors.

The risks of this policy are substantial, not just to China’s economic prospects, but to world financial markets. Read more

Apple is to launch two new research and development (R&D) facilities in China, aiming to expand its presence in this burgeoning consumer market and facilitate closer working relationships with some of the world’s leading consumer electronics and hardware manufacturers. Whether this investment will reverse the trend of falling revenues, however, remains to be seen.

In September, it was revealed that Apple is planning to open a $45m research centre in Beijing, employing 500 people tasked with the development of innovative hardware. One month later, it was announced that a further R&D facility will go ahead in Shenzhen, Guangdong, an area often described as China’s ‘Silicon Valley’. Read more

By Kevin Martin, HSBC

China’s consumers are by no means the wealthiest in the world. But they are years ahead of their counterparts in many developed economies in terms of how they shop and pay for what they buy. In this, they are revolutionising the way consumer finance is conducted in the world’s second-biggest economy.

Like so many of the changes sweeping China, the uptake of internet and digital technologies has happened with head-spinning speed.

As recently as 2000, a mere 1.7 per cent of mainland Chinese were online. Now, the country has more than 700m internet users – a penetration rate of more than 50 per cent.  Read more

By Raffaello Pantucci, RUSI

There has been much speculation on the role of the Silk Road Fund (SRF) and Asian Infrastructure Investment Bank (AIIB) in China’s outward investment push.

They are both instruments created by Beijing to provide economic firepower and bring international credibility to the ‘Belt and Road’ vision that has become President Xi Jinping’s keynote foreign policy concept. But in reality they have both undertaken a series of investments that, while substantial and linked to ‘Belt and Road’ countries, pale in size next to China’s overall outward investments. Read more

By Martin Fischer, Alaco

A series of recent Chinese takeovers of Germany’s top tech companies has unnerved many Germans who fear the trend could undermine the economy. Germany has always been more comfortable as an investor than a recipient of investment, with the Chinese shopping spree sparking a wave of protectionist sentiment, which some German politicians are looking to exploit.

Germany has emerged as the preferred destination for Chinese takeovers in Europe. In the first half of 2016 alone, EY, an accountancy firm, reported that Chinese investment in Germany exceeded $10bn – more than the combined total for the previous five years. But Germans are nervous about the influx of cash, primarily because the companies being acquired are small and medium-sized enterprises that form the backbone of the economy. Read more

By Max J. Zenglein, Mercator Institute for China Studies

China’s leaders place high hopes on the vibrancy of the economy’s service sector, but in reality it has not been able to fill the void left by the decline of manufacturing. The inability of services to pick up the slack in turn creates a temptation for the government to delay overdue structural reforms while maintaining a reliance on investment-driven growth. Read more

The end is in sight for Google’s seven wilderness years in China. With none of the theatrics that accompanied its voluntary withdrawal from the country due to web-search censorship in January 2010, Google is now firmly on a path not only to return to China but also to potentially seize a spot alongside Apple as one of the most profitable tech companies there.

This is a likely outcome of Google’s announcement last week that it is entering with full force the global consumer hardware industry. Google Pixel mobile phones, Google Home artificial intelligence-enabled speakers, Google Daydream View virtual reality headsets, these will be the engines of Google’s revival in China. Based on what Google has so far revealed – including pricing – these products may find a large market among Chinese consumers.

The company has made no specific mention of plans to re-enter China. China’s government will not likely strew the ground with rose petals to welcome Google back. Read more

By Bruno Lannes, Wei Yu and Jason Ding, Bain

Yoghurt is flying off the shelves in China. The value of yoghurt sold in 2015 grew by more than 20 per cent. Meanwhile, instant noodles are suffering a slump. Consumers in China bought 12.5 per cent fewer containers of instant noodles in 2015 than they did a year earlier.

It seems that China’s market for fast-moving consumer goods (FMCG) now operates at two distinct speeds: slow and fast.

The engine behind two-speed China is the government’s official “new normal” policy, which is managing GDP growth at 6.5 per cent to 7 per cent, shifting focus from manufacturing to services and consumption, and pushing for innovation-led growth over investment-led growth. Read more

By Jenny Huang and Ying Wang, Fitch

It’s clear that China is embracing “supply-side reform” to reduce excess industrial capacity and shed unviable assets because its debt-driven growth policies were not working. The shift is essential for battling the middle income trap, but the reform’s effectiveness remains uncertain.

While Chinese leaders have set the tone to let the market play a decisive role, many reform policies have deviated from this principle in light of hefty social and financial costs.

One of the greatest reform challenges is employee settlement in heavy industries plagued by overcapacity including steel, coal and aluminium. More than 2m workers may be affected. Read more

By Eric Lascelles, RBC Global Asset Management

China now commands the world’s attention, having transformed itself into an economic superpower that generates a startling one-third of global economic growth. In a growth-scarce world, the thought of losing even a smidgen of this is unsettling.

For this reason, it is of crucial important to track the constellation of vulnerabilities and unknowns that orbit China. Among these, the country’s housing market is a subject of disproportionate importance. This is due to its centrality, its sheer heft, and also its seeming vulnerability.

Housing acts as something of an economic fulcrum that exerts an outsized influence over China’s banks, heavy industries, builders and households. We figure it is directly or indirectly responsible for a whopping 19 per cent of China’s economic output. Read more

By Luke Nolan, Student.com

China’s magnetism as a destination for international students is intensifying as Chinese universities climb the global rankings and the number of people who study the Chinese language in their home countries also rises.

You need only look at the figures from last year to understand the extent of the boom. A record-breaking 397,635 international students flocked to China for their studies in 2015, which solidified the country’s position as the third most popular destination for overseas students. The US and UK still dominate the market, but China is chasing hard on their heels. Read more

News that Ikea is rolling out an online shopping platform in China – its first in the Asia-Pacific region – could be a sign that Western retailers are at last reacting to rising costs and shifts in consumer shopping behaviour. But what has taken them so long?

Despite operating online models successfully in the UK and other parts of Northern Europe, it has taken Ikea seven years to get to a similar point in China. With stores in major cities including Shanghai and Beijing, Ikea has followed a similar strategy to many other Western retailers; investing in bricks and mortar outlets in China’s thriving tier 1 and 2 cities.

However, consumer demand has been growing right across China and while rising costs remain an issue, Western retailers urgently need a strategy to develop this market potential. Read more

As anyone who reads these pages knows, China’s growth has slowed and its economy is, little by little, rebalancing away from investment and towards consumption. Yet many are also left scratching their heads by news that sales of a wide range of consumer products, from luxury cars to cheap local beer, are so sluggish. If consumption is so strong, why can’t we see it? The answer is simple: people are looking in the wrong places. Both high-end and low-end retail are faring poorly. But look at the middle tier, and the story could scarcely be more different. This is where the consumption boom is unfolding.

Start with the luxury segment. Its best days could well be over. Luxury consumption is slowing, weighed down by a decelerating economy, the ongoing crackdown on corruption and the ‘commodification’ of luxury goods — that is, the idea that Chinese buyers no longer see them as so special or unique. China’s luxury spending contracted for the very first time in 2014. This was just the tipping point. In 2015, Swiss watch exports to Hong Kong, a bellwether of Chinese luxury buying, fell 23 per cent. The sales of Rolls-Royce cars tumbled 54 per cent in China that same year. Read more

By Anthony Chan, Brad Gibson, Jenny Zeng, AllianceBernstein

Issues coming to a head in China’s corporate sector require its government to decide how much freedom to allow the markets and private business. The risk? That policymakers will duck the issues, leaving the economy to drift.

Let’s take a deeper dive into three notable developments that serve as a guide to the direction of China’s economy and its reform agenda.

Default Dilemma
Dongbei Special Steel (DSS)— a steelmaker majority-owned by the Liaoning provincial government— recently defaulted on a Rmb64.4m ($9.6m) interest payment on a privately placed Rmb870m bond issue. DSS is a serial offender: the company has defaulted on seven bonds, totaling Rmb4.8bn in principal. Read more

By Kevin P. Gallagher, Boston University

The Western-backed Multilateral Development Banks (MDBs) are talking a lot about moving ‘from billions to trillions’ of dollars to meet the Sustainable Development Goals (SDGs) and Paris Climate Agreement that aim to shift the world economy to a low-carbon and more socially inclusive and equitable future.

The MDBs talk the talk but do not walk the walk given that they have not increased their paid-in capital to meet the ambitious goals of the SDGs. By contrast, China’s development banks have been doing the walking—but not quite in the right direction. As it hosts the G-20 in September, China is poised to match words and action on sustainable development. Read more

By Raffaello Pantucci and Anna Sophia Young

The vast Chinese northwestern frontier region of Xinjiang may serve as a useful early indicator of how Beijing’s much-touted “Belt and Road Initiative” (BRI) is supposed to work – and how successful it may become.

The region, which is home to several muslim minority peoples, has been wracked by ethnic turmoil for decades, prompting Beijing to seek to nurture social stability by driving economic development through hefty investments.

But for this strategy to gain traction, Beijing realised that it needed to boost development in the region around Xinjiang by building commercial corridors to neighbouring Central Asian countries such as Kazakhstan, Tajikistan, Kyrgyzstan, Uzbekistan and Turkmenistan. Thus, Xinjiang was key motivator behind the BRI concept. Read more