China slowdown

China’s ruling State Council last month released a much-anticipated plan meant to kick the country’s huge state-owned enterprise (SOE) sector into shape. No small amount of kicking is required. Not all but many of China’s 155,000 SOEs are inefficient and often loss-making. Where SOEs do make money, it’s usually because of markets and lending rules rigged by the government in their favor.

Finding a truly good SOE, one that can take on and outcompete private sector rivals in a fair fight is hard. Gong He Chun is one. Customers throng daily to buy its high-quality products, often forming long queues. The employees, unlike at so many SOEs in China, are helpful and enthusiastic and take evident pride in what they are doing. Though local private sector competitors number in their hundreds, Gong He Chun has them all beat. Read more

By Edward Tse, Gao Feng Advisory Company

China’s recent stock market turbulence and currency devaluation has attracted enormous attention from around the world—with a disproportionate amount focused on whether we are seeing the end ofChina’s growth story.

True, many people lost a lot of money (though doubtless some also made a lot) and the reputation of the country’s economic managers has been badly damaged. The aftermath resulting from the meltdown will likely continue to be felt for at least several months, particularly by those private sector companies which have had to shelve plans to raise funds via initial public offerings. Read more

By Hayden Briscoe, AllianceBernstein

The visit to the US later this month by China’s President Xi Jinping comes at a politically sensitive time, with volatility in China’s markets — widely attributed to the effect of policy decisions — rippling globally. In our view, however, China deserves more credit than blame for its recent actions.

As China attempts to make the transition to a more open economy, two things are virtually inevitable: market volatility and difficult policy decisions, many of which need to be taken in the heat of the moment.

A case in point is the government intervention that followed the initial correction in the A shares market in July. This was widely interpreted outside China as a panicky reaction. But China’s share market is largely retail driven, and the need to maintain social harmony is of paramount importance to a single-party state. In light of this, the government’s response makes sense. Read more

Noticeable progress has been made recently in Chinese companies in the areas of capital structure, management and employee incentivisation.

It is has long been said – with some justification – that aligning interests between stakeholders in China was almost impossible. Consequently the majority holder, historically the government in most instances, would dictate expansion plans based on broader economic objectives rather than narrower shareholder return motivations. Read more

Over many years, China has gained acclaim as the world’s manufacturing powerhouse. But today, innovation is flourishing in the world’s most populous nation, which is rapidly becoming a trendsetter with the potential to disrupt business models globally.

On a recent research trip to China, we were struck by the huge enthusiasm for locally developed smartphones and the entrepreneurial spirit sweeping the country. Indeed, the number of patents filed by Chinese residents has surged in recent years, both locally and abroad, to exceed the world’s largest developed economies. Read more

As the Chinese economy posts its slowest growth in six years, major reforms to China’s state-owned enterprises are now in the final planning stages. The Xi Jinping administration has pledged to overhaul and consolidate the state-owned economy to tackle widespread inefficiency and corruption.

A wave of mega-mergers among state-owned firms has already been announced in railways, nuclear power and other industries. Consolidation may be easier politically than market reforms, but it’s not the right way forward. China’s crown jewel firms don’t need to be bigger; they need to be better. Read more

The first whispers of worry about a Chinese property bubble surfaced in late 2009. Since then, the local real estate market has quickened and slowed in line with government measures to stoke or cool the market, but has never crashed. Nonetheless, some market watchers insist that the Chinese property bubble will burst one day. Recent sector weakness has given them further ammunition, as has the near collapse of Kaisa, a mid-sized Shenzhen-based developer.

Until December 2014, Kaisa’s finances were perceived to be strong and sales were rising. Now its survival is at the mercy of lenders and rivals. Its woes started when the government halted some of its Shenzhen projects in December without giving a reason. The chairman abruptly resigned, while debts to banks and bondholders have gone unpaid and the firm is in the process of being acquired by its competitor. It has yet to reach a consensual solution with its creditors. 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

By Dominic Jephcott, Vendigital

The Chinese Government’s decision to embark on a fresh round of industry consolidation as part of a move to strengthen state-owned enterprises (SoEs) and increase their global competitiveness has been a long time coming. It is an understandable response to the slowdown in economic growth, over-capacity in many sectors and poor returns on huge capital investments over the last ten years.

The Made in China 2025 initiative, which was outlined last week at the National People’s Congress, is a 10-year plan for transforming the country’s disparate manufacturing sector in order to create a smaller number of large-scale businesses capable of competing internationally in the higher added-value and strategic industries. Calls to address the endemic inefficiencies of China’s SoEs and increase their global competitiveness are nothing new, of course, but this time it seems there is a clear commitment to make sure it happens. 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 Kevin P. Gallagher and Margaret Myers

Despite the economic slowdown that is gripping Latin America, Chinese finance to the region rose to $22bn in 2014, a 71 per cent jump over 2013. These latest estimates from the China-Latin America Finance Database put 2014 as the second highest year on record for Chinese lending in Latin America and raise the stock of Chinese finance in the region to $119bn since 2005, when China’s banks started reaching out to the Americas.

This new finance couldn’t come at a better time. After a decade-long commodity boom, the International Monetary Fund (IMF) estimates that Latin America’s economic growth may only reach 2.2 per cent in 2015. As the economy cools, the region’s traditional sources of capital are turning to the United States, beckoned by faster growth and rising interest rates. Read more

By Gabriel Sterne and Alessandro Theiss, Oxford Economics

If there was a financial crisis in China, the government could take a big hit, transferring a huge chunk of bad debts onto its balance sheet. But this remedy would have a big impact on the domestic and global economy.

Overall debt (public, private and financial) has skyrocketed in recent years, rising from 176 per cent of GDP in 2007, to 258 per cent of GDP by mid-2014. The debt binge may be fuelling a time bomb in the property market. Read more

Zhou Xiaochan, China's central bank governorClearly, China’s interest rate cut on Friday was motivated by a desire to manage a flagging growth story. But the announcement also revealed a few sub-plots, which together may say more about Beijing’s mindset than the dominant narrative.

The first point, several analysts said, is that Beijing’s monetary easing may well have further to run, following the decision by the People’s Bank of China (PBoC) to cut its benchmark lending rate by 0.4 percentage points to 5.6 per cent, while cutting its deposit rate by 0.25 per cent to 2.75 per cent. 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

By Alastair Campbell and W. John Hoffmann, Exceptional Resources Group

“There is no difference between reform and anti-corruption: both must be implemented within the framework of law”.

So said Chinese leader Xi Jinping, and with the end of a high level Communist Party meeting last month, the significance of Xi’s “Rule of Law” campaign has become crystal clear. It is a key tool in his attempt to restructure the framework of Party political power and decision-making via the four new Party central leading groups which he chairs. Read more

In the years since the financial crisis, emerging markets have been awash with free-flowing global liquidity. Easy money from western central banks – notably the Fed – has driven up equity markets and currencies, and slashed borrowing costs.

On Wednesday, the QE punchbowl is finally set for the dishwasher. So will investors in emerging markets call it a night? Read more

By George Magnus

Serial disappointments in emerging country growth rates since 2011 has forced the International Monetary Fund (IMF) to cut its five-year-ahead forecasts for a group of 153 emerging and low-income developing countries on six occasions since late 2011 (see chart).

However, in its latest World Economic Outlook, the IMF again assumes that current disappointments will give way to restored equilibrium growth rates over the next five years. But what if there is no equilibrium and emerging market (EM) growth continues to disappoint? Read more

By Alastair Campbell and W. John Hoffmann, Exceptional Resources Group

The “rule of law” is set to dominate China’s key Communist Party plenum in October, Xinhua, the official news agency, has said. The rule of law is a “must” if the country is to attain “economic growth, clean government, cultural prosperity, social justice and a sound environment”, Xinhua added.

Many observers would agree. Some may even believe that China is about to embrace a Western-style system in which all actors – the government, institutions, companies and individuals – become subservient to an independent legal code. But what, in practice, is the renewed focus on rule of law likely to mean for China’s development? Read more

There is more gloomy news for the world’s second largest economy. A comprehensive official survey of Chinese households, businesses and banks finds demand for loans slackening further in the third quarter, suggesting scant prospects of a reprieve from the credit slump seen in August and July.

Some 3,100 banks interviewed by the People’s Bank of China (PBoC), the central bank, reported a significant easing in loan demand among all three categories of firms – small, medium and large – for the third quarter, which ends at the end of September.

The loan demand index fell to 66.6 per cent, down from 71.5 per cent (see chart). The muted demand for loans is set to create headwinds for the PBoC’s initiative this week to boost economic growth by injecting Rmb500bn ($81bn) into the five largest state-owned banks, economists said. Read more

By Guonan Ma, Bruegel

Against a backdrop of weakening domestic demand, and in the slipstream of a major debate about whether Chinese monetary policy in the last year has been too restrictive, there have been definite signs of Chinese monetary loosening in recent weeks. This makes sense. Timely and measured monetary easing will support growth, facilitate structural rebalancing and underpin rapid economic reform.

There is little doubt that Chinese growth has been losing momentum. During the past few quarters there were clear signs of rising inventories, slumping property sales, producer price deflation, declining consumer price inflation, weakening corporate earnings, slowing investment and anaemic industrial production. Fortunately, private consumption is still holding up. Read more