For some, China represents a positive scenario of structural reforms returning the country to its position as the engine of world growth. Not only do we think this is unlikely, we actually believe China poses a systemic risk of historic proportions.
It is now clear that China is not smoothly passing its growth baton from exports and investment to the service sector. Official GDP data still show growth, but this has decelerated significantly despite numerous interest rate cuts and massive fiscal support. Read more
By Sarah Lain, Royal United Services Institute for Defence and Security Studies
The Silk Road Economic Belt (SREB) builds on China’s long-standing economic investment in Central Asia, and it has the potential to further develop Central Asian economies. However, China’s historical track record of investment engagement in the region raises concerns that the SREB could instead exacerbate economic inequalities and poor governance.
China has long been a key driver of infrastructure investment and construction in Central Asia, covering a wide range of sectors. It has invested heavily in the region’s natural resource extraction, with gas, oil, uranium, gold and copper making up key exports from the region. Read more
By Philippe Le Corre and Joel Backaler
This year has all signs of becoming another bumper year for Chinese overseas mergers and acquisition activity. In the first three months alone, the total value of cross-border deals nearly reached 2015 annual totals ($101bn and $109bn, respectively).
High-profile deals from the last three months include: Dalian Wanda’s $3.5bn acquisition of Legendary Pictures, a US media company, Haier’s $5.4bn takeover of GE’s appliances unit and most notably ChemChina’s record-setting $43bn bid for Syngenta, a Swiss-based agri-business group.
However, all of this overseas business activity is occurring against a backdrop of a Chinese domestic economy that is facing myriad challenges with a slower GDP growth forecast of 6.5 per cent, reduced domestic demand and decreasing industrial profits not to mention industrial overcapacity. Read more
Every day an estimated 150,000 new Chinese shoppers join the ranks of the hundreds of millions in the country who have discovered ecommerce. Penetration will double by 2020, according to our estimates, with the total value skyrocketing to Rmb 10tn ($1.5tn).
But this dramatic adoption of online shopping is not the biggest news to emerge from Bain & Company’s latest study of China’s ecommerce market, conducted in partnership with AliResearch, Alibaba Group’s research arm. The unexpected finding is how ecommerce is shaping consumer behaviours and the profound influence those shoppers are having on online sellers. Despite its massive growth, China ecommerce is rapidly evolving to become more than a numbers game for both consumers and sellers. Read more
Markets used to cheer when China’s exports rose, believing this showed the global economy was in good shape. They are still hopeful today, despite the 25 per cent fall in February’s exports. But closer analysis of China’s important refining and petrochemical sector shows that a paradigm shift is under way.
No more is China’s economy based on importing raw materials and exporting low-cost manufactured goods. Instead, the focus is on using the new capacity built during the 2009–13 stimulus period to maintain employment and boost China’s self-sufficiency. Read more
US penalties handed down on ZTE, the Chinese telecoms giant, are a reminder that despite January’s partial lifting of sanctions on Iran after UN nuclear inspections, they can still bite.
Previously, the Bank of Kunlun, set up to handle oil for loans and infrastructure deals between Beijing and Tehran during the embargo, had been cited for violations. Chinese commercial and policy banks nonetheless were gearing up last year for legal business, supported by a flurry of official initiatives.
China’s “One-Belt One-Road” outward investment campaign envisions a tenfold increase in Sino-Iranian economic engagement over the next decade to $500bn; Iran took a tiny 2 per cent founding share in the Asian Infrastructure Investment Bank; and the countries discussed bilateral currency swap lines. Read more
China has reminded investors that there’s more to the country than worrisome economic indicators by announcing a significant step in the opening up of its domestic interbank bond market. The move has positive implications for capital flows and the strength of the currency.
One of the challenges in forming a clear understanding of China’s economy from the perspective of investment risk and reward is the complex interplay taking place between cyclical trends and structural reform. Read more
By Mark Schwartz, Goldman Sachs
In the 1990s, trade was the defining issue of the US-China economic relationship. Today, as much as any other issue, the environment binds the two giants of the global economy together.
This week, leaders from the international financial community are gathering in Shanghai for preparatory meetings in advance of the G20 summit in Hangzhou this September. Among the most prominent items on the agenda is green finance– public and private investment in environmental protection and climate change mitigation. Read more
With about every major leading economic indicator in a tailspin, it’s easy, even obvious, to be bearish about China. But, one sign of economic activity could hardly seem more robust: the crowds and cash at gambling tables during this year’s Chinese New Year.
The two-week long lunar New Year celebration finally drew to a close on Monday with the Lantern Festival. Here in Shenzhen, China’s richest city per capita, no sooner do the shops all shut down for the long break than the gambling tables spill out onto the street, like the cork flying out of a bottle.
Gambling, especially in public places with large sums being wagered, is illegal everywhere in China. All the same, the New Year is ready-made for gamblers and street-corner croupiers to gather. For one thing, most police and urban street patrols are also away from their jobs with family. Read more
By Michel Lowy, SC Lowy
Traditionally, investing in Asian high-yield bonds has not been for the faint-hearted. Yet in recent years a new normal emerged; just about any bond delivered strong returns. Such has been one of the results of the extremely accommodative policies of major central banks that have flooded the markets with liquidity, thereby dulling the perception of risk.
However, all this changed last year when steep falls in oil and commodities prices,
together with US high-yield fund redemptions, led to a liquidity shakeout
in the high-yield bond market. The new reality rewarded a discriminating investment strategy – with the Chinese property sector’s high yield bonds returning gains of 20 per cent, even as other market segments such as Indian issuers and Chinese industrials experienced single-digit losses. Read more
By Weifeng Zhong and Zhimin Li
The falling value of China’s yuan has once again become a trigger for state intervention. Fueled by a whopping $1tn in capital outflows last year, downward pressures on the renminbi have prompted the Chinese government to defend the currency by burning $700bn of its foreign-exchange reserves and rolling out a barrage of administrative measures. The latest reserves plunge shows that the government is losing the fight.
While capital flight is a headache for Chinese officials long fixated on managing the renminbi’s value, it may be good news for the rest of the world. As we explain later, it could well mean that the serious economic reforms outlined in China’s new five-year plan, such as deregulations, tax cuts, and other pro-market policies, might become a reality. Read more
By Gilliam Collinsworth Hamilton, NSBO
A crowd gathered around the entrance to the Beijing Guang’anmen hospital. In the centre stood a young woman with an out-of-town accent, according to a video posted on Tengxun Xinwen, a Chinese news and video site.
Like many in the crowd, the woman had travelled to Beijing to see a doctor. But she found too late that she could not pay the scalper’s fee for admittance. Her voice grew hysterical. “This is the great Beijing,” she shouts. “If I die at home today, it would be because our society is hopeless. This is Beijing. This is our capital.” Read more
By Kevin P. Gallagher, Boston University
As Western-backed development banks and the private sector are on the retreat from Latin America, China’s development banks are coming to the rescue, at least for now.
China’s two development banks, the China Development Bank and the Export-Import Bank of China, provided upwards of $29bn to Latin American governments in 2015, according to new estimates published by Boston University’s Global Economic Governance Initiative and the Washington-based think tank The Inter-American Dialogue.
A three-fold increase from 2014, China’s 2015 finance to Latin America was more than the World Bank, Inter-American Development Bank, and the Development Bank of Latin America combined. Read more
Investors’ attention remains focused on the minutiae of central bank policies in the developed world. But they might spare a thought for developments in China’s lending policies.
The implications of these dwarf anything being considered in Tokyo, Frankfurt, London or Washington, as the chart below highlights. It shows the changes since 2008 in official and shadow lending, which together constitute China’s total social financing (TSF). Read more
By Gordon French, HSBC
China’s “Belt and Road” infrastructure investment drive will help boost the flow of physical goods across large swathes of Eurasia, southern Asia and even parts of Africa and the Middle East. Less obvious is the impact that the vast amount of spending linked to the initiative will have in the financial arena – in the currency and bond markets in Asia and beyond.
First announced in 2013, the “Belt and Road” initiative is an essential part of China’s domestic economic rebalancing, and of its outbound ambitions. The initiative entails ploughing billions of dollars into the hardware – railways, highways and ports – that links mainland China and the dozens of countries to its west and south. The goal is to encourage more cross-border trade while putting excess capacities to work. Read more
By Hayden Briscoe and Anthony Chan, AllianceBernstein
The liberalisation of China’s currency and capital account is under threat as the renminbi falls, capital outflows intensify and foreign reserves dwindle. Will the country forge ahead with its reforms or pause to allow the market to settle down? Both, in our view, have their pros and cons.
China’s policymakers face a major conundrum: as the renminbi’s volatility has increased, capital outflows have intensified and depletion of foreign reserves has accelerated (down some $663bn from their June 2014 peak) as a result of market intervention to stem the renminbi’s precipitous decline.
Consequently, Beijing needs to address the “impossible trinity” problem — that is, the fact that no government can control interest and exchange rates while allowing free capital flows. Read more
The Chinese are watching a new storm unfold in their financial markets, only months after being bombarded with news of their country’s “historical victory” when the renminbi was designated an official reserve currency under the IMF’s SDR regime in November.
Inclusion in the SDR has turned out to be a pyrrhic victory, as China’s capital outflows have only accelerated. China lost as much as $108bn in foreign reserves in December, despite a record trade surplus of over $60bn. From a peak of nearly $4tn a year and a half ago, it is now left with $3.33tn in foreign reserves. Read more
The recent inclusion of the renminbi in the IMF’s Special Drawing Rights is a major victory for the People’s Bank of China, which for years has claimed that the Chinese currency deserves to be in the club of top reserve currencies.
It is also a victory for the Europeans, who after the global financial crisis departed from the tough line advocated by the US, arguing that the RMB should be included in the SDR even though China applies controls on its capital account and intervenes massively in the exchange rate. The view in Berlin, Paris and London is that China has implemented a number of liberalising reforms over the past years, which should be rewarded and further encouraged. Read more
The aim of an equity market circuit breaker is to provide safeguards to address market volatility and inspire investor confidence. It’s hard to argue with the rationale, but this week’s new measure in China has had unintended consequences for the world’s second largest economy. And it’s not the first time that the China Securities Regulatory Commission (CSRC) has made such an error of judgement.
Under previous rules, trading in individual mainland Chinese stocks had to remain within a 10 per cent price limit based on the prior day’s close. Monday’s innovation extended restrictions to the entire CSI 300 index, however; this time at even tighter boundaries of 5 per cent and 7 per cent. In essence, if an upward or downward move exceeds 5 per cent, the index goes into auction mode (when trades may be submitted but not executed). A subsequent move to the 7 per cent boundary means all stocks are suspended. Read more
For much of the early 2000s, Brazil, Russia, India, and China (the Brics) were seen not just as “the engine of new demand growth and spending power,” as Goldman Sachs researchers put it in 2003, but also as the likely begetters of a new international order, in which the US – and the west more generally – would play a much less significant role.
Today, the idea that the Brics could lead the way to this new order seems more distant than ever. Read more