CDT Money: Uncertainty Looms in 2013
November data has reinforced the cautious optimism that began to creep into the Chinese economy in September, as factory output and retail sales reached eight-month highs and inflation remained under control. Not all signs pointed in the same direction – exports rose less than expected for the month, and banks missed their targets for new loans – but the overall picture remained one of an economy poised to avert a hard landing and rebound in 2013. And HSBC’s preliminary survey of Chinese manufacturers rose for the fifth straight month in December, hitting a 14-month high.
Economists reacted positively to the data, according to The Sydney Morning Herald:
“The export slowdown shows external demand faces uncertainty due to concerns over the fiscal cliff in the US,” said Zhang Zhiwei, chief China economist at Nomura in Hong Kong. “Nonetheless it does not change our view that growth is on track for a strong recovery in Q4, as (growth) is mostly domestically driven.”
“The Chinese economy is now in a sweet spot and can stay in the sweet spot through the first half of 2013,” Ting Lu, an economist at Bank of America-Merrill Lynch, said before the trade figures were released. “Beijing will be happy to sustain the current policy stance.”
With China likely to post its slowest full-year of growth since 1999, however, Chinese leaders concluded the annual Central Economic Work Conference in Beijing on Sunday by warning that the world’s second largest economy is not yet out of the woods. With Europe’s debt crisis still raging, and with the U.S. economic recovery still uncertain amid the ongoing “fiscal cliff” deadlock in Washington, The Wall Street Journal adds that China’s new leaders “sent their strongest signal yet” that they will focus on retooling the economy to rely less on export growth and more on domestic demand. Here, the China Daily reports that top policymakers continued to pledge reform - from cutting taxes to enabling greater mobility for rural workers, and providing more support to agriculture and innovation – to keep economic growth stable.
But was anything new put forth following the conference? The Financial Times’ Jamil Anderlini checked in from Beijing today with a resounding “no”, writing that the leaders revealed an economic agenda “largely in line with that of the outgoing administration.” Similarly, Keith Bradsher of The New York Times reports that the government released a lengthy statement calling for continuity, at least for now:
The statement endorsed tax cuts, continued curbs on real estate speculation and a broader effort to increase domestic consumption and wean the economy from its dependence on exports and investment.
“The opportunities facing us are no longer the traditional ones of simply entering the international division of labor, expanding exports and accelerating investments, but rather new opportunities forcing us to expand domestic demand, improve innovative capacities and promoting the transformation of the mode of development,” the statement said.
While China has many economic opportunities, “we must soberly recognize that there are still many risks and challenges confronting our national development,” the overview released by Xinhua said. “Problems with imbalances, ill-coordination and lack of sustainability remain pronounced.”
“The contradiction between downward pressures on the economy and relative overcapacity in production is deepening,” the statement continued. “Business operating costs are rising while innovative capacities are inadequate. There are latent risks in the financial sphere.”
Expectations of reform have indeed been heightened of late, as new Communist Party chief Xi Jinping retraced Deng Xiaoping’s 1992 “Southern Tour” with a similar trip of his own last week. The Chinese Academy of Social Sciences even warned last week that China’s economic imbalance had reached alarming levels that would hamper growth in the absence of bold action. Such a warning comes as a new survey indicates that China’s Gini coefficient, or measure of income inequality, may be far higher than previously thought.
While China will need reform to ensure that growth returns to the 8% level that the state-run Bank of China predicts for 2013, not everyone has bought into the rhetoric. MarketWatch’s Craig Stephen wrote Sunday that “once again it looks as if talk is easier than action when it comes to economic reform in China.” The Financial Times’ Kate Mackenzie echoed that sentiment today:
Don’t be misled by the proclamations of ‘reform‘ or ‘quality growth‘ from China’s central economic work conference at the weekend. It’s more of the same, at least for the time being.
The more concrete message was that economic and monetary policies would “remain stable for year ahead”. In other words: keep pursuing for just a little longer the brittle policies of property price inflation, more infrastructure investment, and looser money and credit.
Dr. Robert Lawrence Kuhn, however, does see some key reforms on the horizon. From Forbes India:
I expect substantial changes in the economy in the months following March. In China, it is a (cultural) tradition of new governments to carry on with policies of the earlier regime for a long time. Any change is thought to be disrespectful. But this time, it seems, the risk of not reforming is much higher than the risk of change. For example, there have been a series of corruption scandals. The new leaders will be under more pressure to change much quicker. While I do not expect much change on international policies—the rigid nationalism and tough rhetoric—there will be quick changes on the economic front. Xi Jinping’s opening speech showed this. The address was rational, without the usual political jargon, and offered hope. One feedback I got from his aides is that “the biggest concern now is high expectations”. The seven top leaders are the first batch not picked by Chairman Mao Zedong or Deng Xiaoping. This marks a very important transition for China.One question I am asked very often is for how long will China be able to retain its edge in manufacturing? From the leadership’s standpoint, the answer is clear: Wages have to go up. The economic divide is at several levels—the coastal population versus those living inland, urban versus rural, basically rich versus poor. For decades, rural wages have been increased by moving population to the cities. In the past 40 years, about 500 million people have moved to urban areas. So, the rural population has halved, while income levels have doubled. It is only possible to increase workers’ wages if the margins on manufacturing go up.
The bottom line, according to Asia advertising executive Tom Doctoroff, is that reform is no longer a luxury and all eyes are on Xi Jinping and his new regime to inspire public confidence in his blueprint for economic progress:
Many now ask whether the contradictions of society — between rich and poor, urban and rural, young and old, politically connected and “small potatoes” — are approaching the breaking point. While crisis is not imminent, loss of absolute confidence in the future of the country has manifested itself in many ways, from 200,000 local protests to a slowdown in sales of luxury goods, real estate and autos. According to C-trip, bookings mid-level travel destinations such as Hainan island, usually popular amongst the new middle class, are down dramatically. Job-hopping, perhaps the greatest indicator of economic optimism amongst ambitious Chinese, has slowed, a sign of diffused anxiety.
However, until Mr. Xi outlines specific, incremental steps of structural reform — intra-party checks and balances, independent commercial courts, urban residency reform, rural land-ownership reform, further strengthening of the welfare net and other institutional mechanism to safeguard the economic interests of individuals — consumer confidence will wane. If so, “rebalancing” will remain a long way off, and the China’s potential under-realized. China will certainly not flirt with Western-style democracy or laissez-faire capitalism. But the Chinese, supreme pragmatists that value stability above all else, know the status quo is unsustainable.
Have China’s Trade Statistics Been Inflated?
November export growth of 2.9% may have disappointed, especially when compared to robust figures of 9.9% and 11.6% in September and October, respectively, but what explains the big swing? Forbes’ Gordon Chang points to a couple of reasons why fake transactions may have distorted the trade data:
Are we to believe China had an export boom lasting just two months? Anything is possible, but a more likely explanation for the anomalous September and October figures is that they were distorted by fictitious transactions.
Anne Stevenson-Yang of J Capital Research in Beijing, in one of her November e-mail alerts, suggests that the uptick in exports may have been partly due to hot-money inflows caused by currency speculation. Exporters, she notes, are overstating sales, allowing them to book revenues in dollars. They then use the paperwork to get permission to sell dollars for renminbi. The result is that exporters made money with their currency transactions, but the byproduct is that the Ministry of Commerce’s trade figures overstate China’s exports.
Tom Holland of the South China Morning Post reports an even more ingenious scheme that has artificially pushed up Beijing’s trade statistics. There is, he notes, legitimate trade where goods go from one part of China to another through Hong Kong. For example, it makes sense to transport through Hong Kong components manufactured in Shanghai for final assembly in Shenzhen. Since 1997, Hong Kong has been part of the People’s Republic, but it is not considered as such for customs purposes.
- Japan may have overtaken China as the largest holder of U.S. debt, according to The Wall Street Journal.
- The Wall Street Journal reports that as part of its push to boost domestic demand, China will lower tariffs on a range of imported items next year.
- Bloomberg reports that power consumption posted its biggest monthly gain since February.
- MarketWatch’s Craig Stephen writes that China’s regulator is taking steps to heal its sickly stock markets.
- The State Administration of Foreign Exchange has removed the $1 billion limit for foreign sovereign wealth funds, central banks and monetary authorities investing in China through the QFII program, according to Reuters.