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
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
Liao Min, China Banking Regulatory Commission
Amid increasing concern about risks in China’s banking sector, the latest banking data from Shanghai tells a story of resilience. The region’s non-performing loan (NPL) ration has declined for eight consecutive months to 0.79 per cent at the end of June, much lower than the 1.81 per cent ratio for China’s commercial banks as a whole. Outstanding NPLs shrank by Rmb3.6bn since the beginning of 2016.
Special-mention loans — a classification for loans that might be at risk of becoming NPLs — also decreased in Shanghai, both in volume terms and as a ratio of total loans. Thus, it’s clear that NPL figures aren’t being manipulated by hiding bad loans in the special-mention category.
While China’s rapidly rising debt incites worries among many, China’s leadership seems so determined to meet overly ambitious GDP growth targets that leverage is set to continue to increase steadily. The government targets credit growth of 16 per cent this year, once changes in local government financing are taken into account, and credit expansion so far this year has broadly been in line with that target. Read more
China continues to dominate discussions about the health of the world economy. Many are concerned about the country’s slowing growth and its ability to manage the difficult transition from a controlled economy dominated by manufacturing to a more open economy with greater reliance on domestic consumption. Some policy decisions last year also scared the market.
While the risks are many and real, they are manageable and well-understood by China’s policy makers. This is not the time to sell China short. Read more
By Michelle Chan, VP of Programs, Friends of the Earth US
As chair of this year’s G20, China is mounting an ambitious campaign to promote ways that the banking sector can not only green the Chinese economy, but the global economy too.
Over the past decade, China has prioritised sustainable finance policies as a means of preventing and controlling pollution via its banking sector, leading many to hope that China can lead the world on a greener path towards sustainable finance. The members of the G20 Green Finance Study Group, meeting next month in Xiamen, are certainly betting that China does have something to offer when it comes to green finance.
But have such Chinese finance policies actually led to concrete improvements for the environment? 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
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 Ronald Cheng, Bingna Guo, Sean Wu, O’Melveny & Myers
Chinese companies are by no means immune from the cyber attacks plaguing firms all over the world. More and more are suffering data breaches, which can result in the leakage of customer information, the denial of service, and the prospect of litigation. In July 2015, the national cyber-security emergency response unit received reports of some 11,800 “cyber incidents”. Xi Jinping, the president, has made cyber security an issue of national security.
Partly in response to such mounting cyber security issues, the Chinese government adopted the National Security Law on July 1, 2015. The law for the first time addressed the concept of cyber security and advocated the prevention and punishment of online crime, but did not specify particular measures or punishments. In addition, the law mandated the “national security review and oversight” of all “internet information technology products and services,” naming a pretty broad swath of industries that could be facing more government scrutiny. Read more
While the word has focused on China’s disastrous stock market bailout and the devaluation of the currency, a far larger crisis is brewing in China’s hinterland.
China’s property bubble has sagged in the big cities like Beijing and Shanghai – but it is on the verge of popping completely in the country’s heartland. After spending a week in Sichuan Province, it is clear that land sales, prices and transactions are all declining in double digits.
Sichuan province is one of China’s largest, in the heart of the country. We spent some time at a residential project called Universal City Centre, about 20km from Chongqing. The 1.08m sqm property has seen prices fall one-third from 4,000 to 5,800 psm one-third to 3,000 to 4,000 psm. Read more
China is in the early stages of a domestic M&A boom unlike any other elsewhere in the world. Deal pricing, timing, terms, financing and structure are all markedly different than in other major economies, with likely consequences, good and bad, for global corporations and buyout firms eyeing M&A transactions in China.
For these two, as well as companies wishing to find a buyer in China, the game now is to learn the new rules of China M&A and then learn to use them to one’s advantage.
Chinese companies mainly pursue M&A for the same reasons others do – to improve margins, gain efficiencies and please investors. The main difference, and it’s a striking one, is that in most cases domestic Chinese corporate buyers, especially the publicly-quoted ones who are most active now trying to do deals, have no money to buy another business. Read more
Arguably the most revealing English translation of the French verb ‘étonner’ – at least in the context of Napoleon’s famous quip about China – is ‘to astonish’. “Ici repose un géant endormi, laissez le dormir, car quand il s’éveillera, il étonnera le monde” so the Corsican is said to have noted. “Here lies a sleeping giant, let him sleep, for when he wakes, he will astonish the world.”
Some 200 years later, that giant has awoken and Napoleon was right: China is now astonishing the world. In the past three decades, it has roused itself from a slumber to a state of almost unimaginable vibrancy. The roll-call of economic trophies it now claims is daunting: largest exporter, importer, foreign exchange reserve owner, commodity consumer, luxury goods market, most car sales, most internet users, even (in purchasing power parity terms) biggest economy. Read more
By Andy Rothman, Matthews Asia
Will China’s real estate market crash? No, not in my opinion. China’s residential property market is significantly softer now. But I believe there is very little risk of a crash. House prices are stabilising in China, and are likely to rise again by the second half of this year on a year-over-year basis.
But keep in mind that because of the base effect, prices are likely to fall year-on-year at a steeper rate through much of the first half of this year, leading to a growing chorus of predictions of a housing crisis. Read more
The decision of several European countries to join the China-inspired Asian Infrastructure Investment Bank has created a widely believed narrative as follows. Beijing, frustrated by its exclusion from the centres of power in existing international economic institutions, creates its own. The accession of the UK to the bank, followed by (to date) five other European countries, is a powerful testament to China’s role as a rising hegemon.
This narrative is not wrong, but is far from the whole story. First, China’s decision to bypass multilateral institutions and go it alone with development lending was hardly forced on it. Second, Beijing’s willingness to allow western nations to join the AIIB is also an admission that its bilateral efforts have often not worked well. Read more
The second cut in China’s interest rates in three months reveals key elements in Beijing’s thinking as it tries to reconcile an economic policy agenda beset with conflicting priorities, analysts said on Monday.
The task before China requires some delicate manoeuvres. It aims to wean the country off an extraordinary debt binge (see Martin Wolf ) while keeping GDP growth fairly robust. It hopes to combat disinflationary pressures while preventing the renminbi from sliding too sharply against the US dollar. It wants to curb a dangerous slump in industrial profits without resorting to another round of investment pump-priming. It needs to keep domestic liquidity levels buoyant in spite of a surge in capital flight. Read more
By Joseph Dobbs, European Leadership Network
Russian aggression towards Ukraine this past year has seen Vladimir Putin, the Russian president, lambasted by Western leaders. China has desisted from such criticism and instead signed two major gas deals worth hundreds of billions of dollars, co-operated in establishing a new development bank, and conducted joint military exercises. For some, Russia and China’s co-operation demonstrates their potential to challenge the global order. But in reality Russia’s pivot east faces too many hurdles to represent a viable alternative to working with the West.
Russia and China have much in common. Both states are increasingly nationalistic and share a common perceived threat of Western containment. In Russia’s case this threat comes primarily from the potential expansion of the North Atlantic Treaty Organisation (Nato). China’s perception of US containment strategies derives mainly from the American military presence in East Asia. Leaders in Moscow and Beijing have both watched with unease as the West supported the Arab Spring and the so-called “colour revolutions” that rocked the likes of Georgia, Ukraine and Kyrgyzstan. Read more
By Hayden Briscoe, Shamaila Khan and Jenny Zeng, AllianceBernstein
Based on insights from our team’s recent trip to China, we noted that the country is likely headed for a long economic landing. What does that mean for its infrastructure and commodity sectors? Read more
By Hayden Briscoe, Shamaila Khan and Jenny Zeng, AllianceBernstein
China’s economy isn’t headed for a hard or soft landing — instead, it’s more likely to be a long landing. That’s our perspective, based on our team’s recent visit to China to get an up-close look at the economic landscape.
The country’s economy clearly faces another few years of uncertainty and negative headlines, but we think the risks will be contained as long as the government sticks to its reform agenda. On our China trip, we assessed conditions in important cyclical sectors such as banking, basic industries and property. Read more
By Xiao Qi, China Confidential
China’s shadow finance sector has become a global concern. The International Monetary Fund (IMF) and World Bank have both warned about the risks associated with the rapid build-up of assets within such an opaque sector, while central bankers now regularly reference Chinese shadow finance as a key potential risk to global economic stability.
But while concern over the lurking horrors in China’s financial shadows remains justified, regulatory actions mean that the systemic risks that they pose are finally starting to ebb. This is happening in spite of the fact that the overall scale of the shadow system is continuing to expand. Read more