Yukon Huang is a senior associate at the Carnegie Endowment and a former country director for the World Bank in China.
© The Financial Times Ltd 2015 FT and 'Financial Times' are trademarks of The Financial Times Ltd.
Yukon Huang is a senior associate at the Carnegie Endowment and a former country director for the World Bank in China.
The last time China got serious about reforming its state-owned enterprises (SOEs) was nearly two decades ago when hundreds of firms were privatized or liquidated annually under the mantra of “grasp the large and release the small”. But with the turnover in leadership to Hu Jintao in 2003, Beijing became less willing to close poor performers and relied on the newly created State-Owned Assets Supervision and Administration Commission (SASAC) to instil a stronger commercial orientation among those not let go. SASAC, however, only served to protect their existence through cross subsidization of loss markers by the more profitable firms, who benefited from their monopoly positions in key sectors. Under pressure, Beijing has now proposed a new strategy of mixed ownership to improve SOE performance, but this will not solve the problem.
Profitability differences between private firms and SOEs mattered less before the global financial crisis, when return on assets was increasing steadily for both groups. But since 2008, returns for private firms have surged to 11 per cent while those for SOEs have fallen and stagnated at around 5 per cent (Figure 1). Policy makers and academics point to this widening gap as evidence of the poor performance of SOEs. Few, however, have noticed that the firms’ profit margins, another commonly used measure of profitability, have converged in recent years. Prior to the crisis, SOEs were actually more profitable than private firms (Figure 2). Read more
The former US Treasury secretary Lawrence Summers and his Harvard colleague Lant Pritchett recently delivered a reality check on the Chinese economy’s prospects by publishing a study indicating that China’s growth will average only 4 per cent a year for the next two decades. At the same time, the Conference Board issued its study with similar conclusions.
The Summers-Pritchett study is a statistical exercise drawing on cross-country experiences, which is then applied to China (and India). The Conference Board projection is China-specific but makes some debatable assumptions about the lack of reform. It also discounts quality and productivity increases while coming up with its slow growth scenario. In contrast, staid institutions such as the World Bank and International Monetary Fund foresee annual growth rates closer to 7 per cent for 2020 going down to 6 per cent by 2025, and one must not overlook the pessimists who see an imminent financial crisis with growth collapsing. Read more
Whether one feels positive or negative about China’s economic prospects, everyone can agree that its indicators are a mess. But the fact that the data are flawed does not mean that they are deliberately manipulated to yield a particular outcome.
These distortions affect two key policy concerns that dominate public attention. One has to do with purportedly overstated gross domestic product growth rates. The other involves perceptions about China’s unbalanced growth as reflected in its extremely low consumption share of GDP and high investment share. Read more
Many people are worried about shadow banking, finance which exists outside of regulated banks, in China. Fitch, the rating agency, has raised alarms about its growing presence in the country and critics cite countless examples of seemingly risky and irresponsible lending in warning that a financial crisis looms.
Whether shadow banking really is a worrying danger or merely evidence of a maturing financial system depends on its magnitude and risk profile. Various estimates indicate that the sector has doubled its share of new credit from about 20 per cent in 2008 to 40 per cent by June 2013, at which point it accounted for roughly a quarter of the outstanding credit stock. Read more
There are no signs that China’s slowdown has bottomed out. A turnround would require some combination of a pickup in investment, exports or consumption in the midst of current efforts to deleverage and this is unlikely to happen soon. More than a decade ago during the Asian financial crisis, China was able to revive growth despite a similarly severe debt problem by tapping buoyant global markets facilitated by its accession to the World Trade Organisation.
But circumstances this time are different. The recovery in the US and Europe continues to be tepid with both parties needing to generate stronger trade balances to support their recoveries. Thus any bounce in exports is likely to be modest and China will face continuing pressures to scale back its trade surpluses with negative consequences for industrial production. Read more
After prolonged debate, China’s long anticipated “New-Type Urbanisation Plan 2014-2020” was unveiled in mid-March. There is much to be applauded. It rightly focuses on improving the quality of urbanisation by reining in wasteful investments, meeting the social needs of migrant workers, addressing environmental concerns and developing new financing sources. The ultimate target is that by 2020 China will be 60 per cent urban compared with 54 per cent today.
—But its flaw comes from a seemingly reasonable stipulation that the size of the largest cities should be “strictly controlled” and labour migration should be targeted at the smaller and medium-sized cities. This restriction not only violates a central theme of the leadership’s Third Plenum in Beijing last November — that the market and not the government should play the “decisive role” in allocating resources — but it also will make it more difficult for China to achieve much needed productivity gains. Read more
Whenever there is a sign of possible weakness in China’s financial armour there are voices that cry out that a crisis is brewing. The latest example is the recent default on a bond payment by Shanghai’s Chaori Solar Energy Science and Technology. This quickly prompted questions about whether this was China’s “Bear Stearns or Lehman moment”. Less alarmist views welcomed the default as a signal that the government wanted to instil a sense of prudent risk-taking.
Interpretations of Premier Li Keqiang’s statement that future defaults may be unavoidable also depended on one’s sentiments, with some seeing it as a sign of imminent problems and others dismissing it as an acknowledgment that defaults are part of every economy. Read more
Some market watchers, shaken by the eye-popping increases in China’s debt indicators, have concluded that a financial crisis is imminent. After all, countries whose debt ratios have risen by similar magnitudes in just a few years have all crashed soon after. China, they say, seen as no different.
Yet when analysts drill into the balance sheets of borrowers and banks, they find little evidence of impending disaster. Government debt ratios are not high by global standards and are backed by valuable assets at the local level. Household debt is a fraction of what it is in the west, and it is supported by savings and rising incomes. The profits and cash positions of most firms for which data are available have not deteriorated significantly while sovereign guarantees cushion the more vulnerable state enterprises. The consensus, therefore, is that China’s debt situation has weakened but is manageable. Read more
The December spike in China’s interbank interest rates, following a similar episode in June, reinforces two widely shared perceptions. The first is that dealing with the current debt overhang will exacerbate volatility; the second is that interest rates are too low. That financial reforms are needed, despite the risks, is beyond dispute. But whether interest rates — specifically deposit rates paid to savers — are actually too low, as many China-watchers have argued, is debatable. Read more
The let-down that China watchers felt when the much anticipated summary communique came out of the third plenum of the Communist party was soon overridden by the ambitious agenda laid out in the subsequent “decision” document. Despite the vagueness of the communique, the “decision” provided a comprehensive reform programme that, if acted upon, will absorb the energies of this generation of senior leaders and beyond. Ironically, rigorous implementation of these reforms will alter market incentives so that annual gross domestic product growth in the coming years could rise to 8-plus per cent even as the recent Central Economic Work Conference debated whether to lower the official target to 7 per cent to reinforce that quality now matters more than quantity. Read more
Was the outcome of the Third Plenum “unprecedented”, as one member of the standing committee expressed beforehand? Or at least “comprehensively deepening reforms”, as characterised officially? After four days of silence when the only indication that something important was happening was the increased security, the final communique offers both encouragement and uncertainty.
The communique was comprehensive in the tradition of previous statements. Present were both the obligatory homage to the past leadership is there (“the magnificent banner of Socialism with Chinese characteristics”, “Deng Xiaoping Theory”, “the important Three Represents thought”) and the affirmation of the dominant role of the Party. It also managed to mention all the issues without offending any constituency: “establishment of an innovative economy, governing the country according to the law and accelerate the perfection of cultural management.” Read more
The latest growth figures in China – published on Friday – suggest that the country’s economic slowdown has indeed bottomed out. Its economy expanded at an annual rate of 7.8 per cent for the third-quarter of this year, up from a rise of 7.5 per cent in gross domestic product from the previous quarter. The storyline is becoming a bit monotonous and perhaps that is good. However, views over whether this rebound is sustained are mixed. Optimistic bulls predict the small uptick will continue next year yet the less convinced bears factor in a small decline. There are also extreme bears who still predict an imminent collapse or growth falling to an annual rate of 3-4 per cent. Of the latter two arguments, one is implausible and the other illogical. Read more
Markets are having a hard time interpreting China’s economic slowdown and evaluating policy options. At one extreme, some observers are talking about a potential dynastic collapse. But most have turned to the notion that economic growth needs to be more consumption driven since the almost universal view is that China’s growth is unbalanced, with consumption as a share of gross domestic product having declined steadily to below 35 per cent – the lowest level of any major economy – while its investment share rose to above 45 per cent, correspondingly the highest.
The reason for this imbalance is often attributed to low interest rates or an undervalued exchange rate. This has been the easy explanatory option since financial markets are comfortable with prices driving outcomes. But in his article in The New York Times last week, Paul Krugman is unique among prominent commentators in getting it right. He notes that China’s unbalanced growth is explained by the Nobel Prize-winning model by Arthur Lewis that shows how the transfer of surplus workers from the rural sector to the modern economy, complemented by rising investment, leads to rapid but unbalanced growth. The model also lays out the conditions when labour supplies tighten, growth slows and China’s economy eventually becomes more balanced – referred to as the “Lewis turning point” – and this as argued by Mr Krugman is causing China to “hit its Great Wall”. Read more
Lurking in the background of the imminent US-China strategic dialogue are concerns about what role, if any, the world’s second-largest economy will play in the Trans-Pacific Partnership and how the that trade grouping will compete with or complement the Regional Comprehensive Economic Partnership. Getting the details of these mega-regional trade deals wrong could seriously damage Asia’s regional economic infrastructure – a point which is often overlooked. Preventing this will require both China and the US to take more active positions. Read more
Markets have not been enthused by the numbers coming out of China in recent months. Typical headlines are “China’s production indicators disappoint” or “analysts are worried that rapid expansion is faltering”. Estimates of China’s economic growth this year are slipping from more than 8 per cent to something closer to 7.5 per cent. Those concerned about the country’s longer-term growth challenges, however, tend to be more relaxed about near-term outcomes but preoccupied with the new leadership’s commitment to reforms.
Is there a trade-off between reviving the economy and establishing a sustainable basis for longer-term growth? Unfortunately there is. Beijing has run out of good options to further stimulate the economy as a strategy to buy time until western economies rebound. Read more
In 2005 Robert Zoellick, as US deputy secretary of state, proposed that China might play the role of a “responsible stakeholder” in helping to shape the international agenda. But despite its meteoric rise, most observers now do not see Beijing playing this role. China is often seen as uncooperative on issues ranging from trade and investment flows to intellectual property rights, climate change and the acquisition of natural resources. This has created the impression that Beijing is more inclined to use its clout to advance core interests than strengthen partnerships. Read more
For Li Keqiang, premier designate, it is more than just a growth driver — it is the key to addressing many of the country’s challenges, from inequality and environmental degradation to exploitative land grabs by local officials. Read more
It is easier to make money than sense out of China’s banks. These big four state-owned commercial banks are huge profit centres, but many who see vulnerabilities in China’s economy think these banks are the problem when they actually reflect symptoms of distortions elsewhere. China’s banks are in fact too secure – and their performance could be improved by strengthening competition and breaking up the “too big to manage” entities.
Many critics cite inflexible interest rates that are deemed too low relative to inflation as the issue. Others point to excessive government interventions fomenting risks such as a property bubble. Still others remind us the state-owned banking behemoths are sitting on a mountain of household deposits that feed into temptations to misuse captive funds given lax governance safeguards. Read more
2013 will be remembered as the year China became a more “normal economy”. What does normality mean for China? Soon-to-depart Premier Wen Jiabao’s oft-cited quote that China’s growth is “unbalanced, unsustainable and uncoordinated” is a good place to start.
China was an abnormal economy with its state-led capitalist approach that produced double-digit growth rates, no major financial crises and average wage increases of 12 per cent annually for decades. But the drivers of this impressive economic transformation will no longer be available to the new leadership. Beijing cannot simply open the monetary floodgates to stimulate the economy as was done in previous downturns. Read more
With each generational change in the party leadership, there is a burst of wishful thinking that major reforms may now materialise. The more cautious realise that China’s collective leadership system reduces the likelihood of game-changing shifts, and history tells us that progress is more likely to come from initiatives that are piloted locally and then adopted nationwide. Read more
It would seem obvious that both sides have more to lose in disrupted economic relations than they could gain from controlling a few mostly inconsequential islands. But if combative rhetoric and political grandstanding prevail, then the economic calculus may shift from protecting mutual benefits to assessing which side will be hurt more if economic pressures are brought to bear. Read more
What should one make of the indicators coming out of Beijing that have regularly fallen short of market expectations; the most recent being an August PMI — further revised downwards this morning — showing manufacturing intentions hitting a nine-month low? Read more
Chinese companies seeking opportunities abroad are now primarily motivated by the search for resources with showcase examples in Africa and Latin America and a notable victim of politics being Cnooc’s pursuit of Unocal in the United States. That failure contrasts with the Cnooc’s attempted $15bn acquisition of Nexen’s oil and gas assets, which if approved by the Canadian Government could represent a landmark shift in how Canada views the US and China. Read more
Chastened by the explosive growth of credit-financed expenditures from the past stimulus program, China’s system now has to rely on the recently announced fiscal efforts to accelerate expenditures on infrastructure projects including roads, rail and power plants. While more transparent and less prone to waste, the fiscal channel is more bureaucratic with its expansionary impact less readily felt compared with the banking channel. Thus there continues to be a risk that Beijing’s fine-tuning of macro policies will fail to keep growth on the desired trajectory. Read more
Mr Wen’s predicament is that turning to the hard option would not necessarily make life easier for the CPC. To the contrary, the process would become more bureaucratic and sacrifice some timeliness. But the change would encourage more representative, accountable, and transparent decision making, curb opportunities for corruption, and reduce the likelihood of waste—all issues that are now being debated more seriously in the wake of the Bo Xilai scandal. Read more
Premier Wen Jiabao’s report to the legislature covered every problem facing the country. He and his generation recognised China’s many ills. But these same issues have been highlighted every year—while the pace of reforms has slowed. It’s wise to separate good intentions from action.
So is there any way we can trust the policy messages coming out of the NPC? Read more
This year’s session of the National People’s Congress takes on added significance with the impending anointment of the next generation of senior leaders. China would seem to have many reasons to be self-satisfied given the strong prospects for a “soft landing”, a mountain of foreign assets that Europe is eager to tap, and an expanding regional presence that the US has had to take notice of.
Yet the leadership recognises that the country faces daunting economic, social and environmental challenges including vulnerabilities created by past excessive credit expansion. Wen Jiabao, China’s premier, warned on Monday that growth is set to slow this year.
But these are likely to be seen as technicalities among those gathered in Beijing. Far more worrisome for the political elite is the question of how to deal with rising social unrest. This was underscored by the global attention given to the Wukan village land-related protests that pushed provincial leaders to support more open local elections. Other disturbances such as recent unrest by migrant workers at Foxconn reflect the tensions stemming from decades of widening social inequality that seems out of place for a regime that originated from egalitarian ideals.
If the incoming senior leadership wants to deal with the systemic issues that have spawned rising social unrest, it needs to rethink some of the unintended consequences of its current growth driven model. Paramount is to reshape China’s economic institutions and control over basic resources in ways that moderate, rather than exacerbate, disparities. Read more
Xi Jinping, China’s designated next leader, visits the US this week, in the middle of a divisive presidential campaign whose protagonists often find it convenient to blame China for America’s woes. He will face protests over unfair competition and currency manipulation, and tense discussions about human rights and security.
Chinese sensitivities, on the other hand, have been heightened by the election rhetoric and by US reaffirmation of its interests in Asia. Beijing is keen to strike a constructive note, urging collaboration to solve global problems. Such visits are also seen as an opportunity for Mr Xi to establish personal relationships, with planned side trips to Iowa and Los Angeles intended to show a softer, less formal side of the future leader. How Mr Xi is treated will be scrutinised. This will force Barack Obama and congressional leaders to weigh the pressures of partisan politics against the future of the relationship. Read more
The slowdown in China’s economic growth last year has fostered mixed reactions. Some argue the recently-released 9.2 per cent annual rate exceeds expectations and is consistent with a soft landing. Others see the fall from 10.4 per cent in 2010 as an indication that a sharper drop is still to come.
Without actions to support growth, the pace may fall below eight per cent in 2012. Beijing is likely to lower taxes and consider special incentives to spur consumption. But the real challenge is to encourage less frugality among the Chinese, especially among migrant workers. Policies must be designed to deal directly with the exceptionally high rates of saving by people and corporations. This would have big implications for the trade balance, a contentious issue with the west.
Providing migrants with more security and encouraging higher corporate dividends could increase consumption by some five percentage points of national output. This could turn China’s current trade surplus into a deficit. These distinct and politically sensitive reforms would also lessen China’s alarmingly high income disparities. This strategy, with benefits for all, contrasts with that of pressuring China to strengthen the renminbi, perceived by Beijing as benefiting the US at China’s expense. Read more
History will look back on 2012 as the year when China anointed its “fifth generation” of leaders and shifted to a slower growth trajectory – against a backdrop of increasing social unrest, widening income disparities and rising external tensions. Beijing will be fixated on preserving stability, but reduced economic flexibility could stop it doing so.
In truth, slower growth of around 8 per cent could be better for China and the world: more sustainable and equitable outcomes would ease popular concerns and higher consumption would improve global trade tensions. But many foresee an economic collapse, arguing that a property bubble could combine with a prolonged eurozone crisis to render vast swathes of industry unprofitable. Others believe that Beijing has ample resources to avoid a crisis, but may not have all the necessary economic tools at its disposal.
Domestically, mounting inequalities have nurtured a sense of injustice, 200m migrant workers remain second class citizens and corruption is worsening – but China’s economic success has fostered unwarranted self-confidence. Rather than tackling these problems, the system has moved aggressively to contain social discontent.
Beijing’s belligerent responses to overlapping maritime claims have also heightened worries in a region already wary of its economic clout. To China’s dismay, this has driven its neighbours to support a stronger US presence in Asia and has complicated regional trade integration.
The potential for conflict will force China and the US to redefine their roles in a shifting environment that neither is comfortable with. Asian countries are in a position to delineate the boundaries of influence for these two powers but, given their varied interests, alliances will shift depending on individual concerns.
China must walk a narrow line at a time when its outgoing leadership is reluctant to take any far-sighted decisions.
With the renminbi depreciating for six straight days starting last Wednesday, debate about its value has been renewed. Markets are fixated on whether Beijing will allow or even encourage the renminbi to depreciate further although diplomatic pressures remain strong for continued appreciation.
Although the global economy has deteriorated, paradoxically, conditions are better than a year ago for moving to a more flexible exchange rate system. A prolonged slowdown in global economic activity from the eurozone crisis, coupled with a sluggish US recovery, is now likely. With China’s key export markets under stress, its trade surplus will decline to about 1.5 per cent of gross domestic product this year from around five or six per cent several years ago. Coupled with the efforts to liberalise imports, China’s trade surplus may soon evaporate.
In recent months other east Asian currencies have become more volatile and on balance have depreciated significantly. Given the strong interlinkages in regional currency movements due to their shared production network, China will also be pulled into greater flexibility. And since inflation in China will remain relatively higher than its key western trading partners, its real exchange rate may appreciate marginally even if nominal rates decline. All this will create a conducive environment for China to develop a more flexible exchange rate system where the prospect of a decline is the same as of an increase – as it should be. Read more
Over the past year Beijing has been caught between sticking to restrictive policies to achieve a ‘soft landing’ and switching gears to deal with the repercussions of the eurozone crisis. The cut in China’s bank reserve ratio by 50 basis points, which came a surprise to some, signals that the risks of a major economic slowdown are now of greater concern than an overheated economy. Data showing that Chinese manufacturing activity contracted last month for the first time in almost three years only added to those fears.
The prospect of political unrest has expedited this shift to more accommodating policies. Reports of dramatic falls in exports and the immediate impact it has already had on firms in Guangdong have spurred the leadership to act now.
While further monetary relaxation is likely, given the six increases in the reserve requirements over the past year, China has less flexibility in using either interest or exchange rate adjustments to support its objectives. Ironically at a time when the US is putting pressure on China to let the renminbi appreciate, the concern now is that exports are falling too fast. China’s trade surplus may total only 1.5 per cent of gross domestic output this year and could even disappear in the near term. Read more
The recent assessment of China’s financial stability by the International Monetary Fund highlights increasing vulnerabilities stemming from the government’s role in the lending process, and an inflexible interest rate policy. Those who regard weaknesses in the banking sector as a likely trigger for a financial collapse have railed against China’s negative real interest rates and the speculative activity this has spawned.
But focusing on emerging financial risks is a case of treating the symptoms of the problem, rather than its origins. With its responsibilities for providing a broad range of services for a mixed socialist economy, it is surprising how small China’s budgetary footprint actually is. Beijing has been using the financial system to fund public expenditure needs – many of which are not commercial in nature and would normally be undertaken through the budget. While this was unavoidable in the earlier years, it has turned out to be a politically attractive and effective option in dealing with the volatility of the global economy over the past decade.
As such, these hidden banking losses are actually quasi-fiscal deficits, rather than traditional non-performing loans. While on paper China’s does not run major budgetary deficits, these quasi-fiscal deficits in the banking system have been accumulating over the years, awaiting the time when the non-performing loans are formally recognised and written off. While one cannot dispute that China needs to act on financial reforms, the real challenge is for Beijing to recognise the importance of strengthening its fiscal system to undertake expenditure requirements in a more transparent and potentially less destabilising fashion. Read more
That China’s third quarter growth rate of 9.1 per cent, just marginally below forecasts, would spark a sell-off in the markets says a lot about the gloomy state of the global economy. Analysts have not yet decided whether a rate below expectations is good or bad, given the concerns about inflation.
Ostensibly, Beijing’s goal is to manage a “soft landing”. But even at home, many have not fully accepted the premise of the current five-year plan that slower, but higher quality growth, averaging seven per cent, is better. Making a credible case for slower means challenging the traditional objectives that have preoccupied China’s leaders during the post-Mao reform era. Two targets have been sacrosanct – price stability and employment generation – with the understanding that rapid economic growth makes them more achievable.
But times have changed. China’s needs now are very different to what they were a generation ago. Beijing and the rest of the world need to be more relaxed about China’s declining growth rates provided that the process is managed well – which, of course, is a big if. Read more
Once again US Congress is finding it more convenient to play the China currency card as the panacea for America’s economic woes, rather than deal with the difficult issues in President Barack Obama’s recent employment bill.
Many within China thought that given recent developments, criticisms of its exchange rate policies would become more muted. After all, it has continued its policy of gradual appreciation of five to six per cent annually. With the euro crisis and strengthening US dollar, the renminbi has been the exception in appreciating, while other major currencies have depreciated. And although reserves continue to pile up, this is seen as having more to do with capital inflows seeking higher returns – encouraged by expansionary US monetary policies – than by misaligned exchange rates.
While a full-blown trade war is not in China’s interests, its leadership will not let any perceived negative action go unchecked. If Congress gets its way, the net impact will not be more American jobs, but reduced global demand and higher prices for US consumers. America should worry more about maintaining its position at the upper end of the technology spectrum than futile currency wars. Read more
China’s announcement today that inflation in May hit a three-year high of 5.5 per cent and industrial expansion exceeded expectations will buttress those who see an inevitable economic crash coming. But even those who remain confident that a soft landing is possible seem to agree that China’s economic growth is unbalanced, with these imbalances widely blamed for trade surpluses with the west. This view, however, is much exaggerated.
The conventional view leads many to propose a standard solution to “rebalancing”: China must increase consumption and dampen investment. This problem is this view is static. Growth, however, is inherently unbalanced. What matters are not indicators pointing to imbalances, but the direction of change. Read more
|About this blog||Blog guide|