China Research

Kina – dags för ny varning om ekonomin

Sammanfattning / Summary in Swedish

Den 2 januari i år bestämde Kinas centralbank ”People’s Bank of China (PBoC) att sänka affärsbankernas kassakrav från och med den 6 januari 2020 för åttonde gången på cirka två år. Ett sådant steg sker vanligen i syfte att stimulera ekonomin genom att den vägen öka bankernas utrymme till nya krediter.

Det finns dock tre problem i detta sammanhang. För det första kan en dylik åtgärd mycket väl tolkas som en negativ varningssignal, det vill säga att ekonomin verkligen har uppenbara tillväxtproblem (se min blogg chinaresearch.se från den 10 september och den 2 december 2019). För det andra är det inte säkert att utvidgade kreditresurser verkligen leder till en snabbare ökning av kreditefterfrågan. För det tredje kan man inte utesluta att ökad kreditgivning p g a sänkta kassakrav kan medföra en kvalitativ försämring av bankernas kreditportföljer, exempelvis genom att hålla svaga statsföretag under armarna.

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It happened again, China has formally lowered the commercial banks’ cash reserve requirement at the central bank (PBoC), also called the Reserve Requirement Ratio (RRR) – for the eighth time since the beginning of 2018 (and further room to ease more). In previous blogs, I concluded that such an intended growth-stimulating measure should be interpreted as an obvious warning signal – but by avoiding a lot of noise. I maintain this view also this time.

However, I certainly got surprised when quite a number of interpretations in the beginning of January commented that the lowered RRR could function as the starting point for a positive turnaround of the current GDP-growth cycle. The additionally added liquidity for new credits amounts to 800 billion yuan or in dollar terms worth roughly 115 USD. This means something like 0.7-0.8 % of GDP, i.e. not as much as the absolute number may indicate.

The critical points of interpreting lowered cash requirements

At least currently I do not share this growth-favoring view on the lowered RRR, for three different reasons:

First, it can be doubted whether China currently really suffers from an insufficient supply of necessary new credits.

Second, it can be assumed that the current growth problems in the Chinese economy to a high extent are caused by structural and global political reasons; ongoing acute credit reliefs play in most future structural needs and political considerations like protectionism almost no role.

Third, there is an obvious risk that the banks will give additional credits to unhealthy state-owned enterprises which would mean a further weakening of the quality of their credit portfolios. Who believes, by the way, in the accuracy of the official ratio of non-performing loans (NPL) at 1,9 % of all bank credits (September 2019), provided by the China Banking and Regulatory Commission?

For my own sake, I would like to see much more transparency also in this statistical respect. Sure, more reliable NPL numbers would mean major progress. But how and when can we find out at some point that reliability really has been rising in the past quarters or years?

GDP for 2019 to be published soon without surprises – existing pressure to perform (officially) well in 2020

In my blog chinaresearch.se from December 18 last year, I wrote that “the official objective of meeting a GDP-growth rate between 6 and 6 ½% in 2019 will certainly be met, probably very close to 6 ¼% (more exactly, my own number is 6.2 %). As regards 2020, an official objective for GDP like “around 6%” or “6% exactly” can be expected. This would mean only a very slight downsizing from 2019.

But I cannot imagine any lower goal numbers than these two at this very moment – and I cannot imagine more than one quarter with an official GDP growth (very slightly) below 6 % – and if necessary, the GDP-growth curve has to be reversed to the better during 2020 ahead of the 100^th anniversary day of the Communist Party in 2021 and the start of the new five-year plan – the 14^th – the same year. Do not miss the publication of the preliminary GDP results for 2019 as soon as on January 17!

Only two days earlier, the U.S-China Phase One trade agreement is intended to be signed in the U.S. However, doubts remain, also what concerns future interpretations by the U.S. administration to what extent China is sticking to the agreement.

Later on, a Phase Two deal will probably become even more complicated than the Phase One agreement text. Many sensitive issues still have to be taken up and included in future agreements between the U.S. and China – among them in Phase Two the enormous Chinese government subsidies to state-owned enterprises and FDI restrictions for foreigners in China.

I will be back before the Lunar celebrations and the year of the Rat will start on January 25.

Hubert Fromlet
Affiliate Professor at the School of Business and Economics, Linnaeus University
Editorial board

 

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Kinas (officiella) ekonomi 2020 – relativt lätt att prognostisera

Vanligtvis presenteras prognoser så här års med tillägget att bedömningar för det kommande året denna gång ter sig speciellt svåra. Åtminstone vad gäller den ekonomiska politiken och BNP-utfallet för 2020 verkar osäkerheten emellertid begränsad avseende Kina. Möjligen kommer det officiella tillväxtmålet för 2020 att sänkas något från 6-6 ½% i år till 6% exakt eller cirka 6%. Hur som helst, inför starten av den nya 5-årsplanen och firandet av kommunistpartiets 100 års jubileum år 2021 har det officiella Kina ej råd med en synlig tillväxtförsvagning.

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Usually, economists add to their outlook for the coming year that predictability this time is more limited than ever. In the case of China, however, such a kind of precautionary reservation for 2020 seems to be superfluous, at least for the official China. Reality, however, may look somewhat different, i.e. GDP growth may come in (slightly) lower than official national accounting will tell us. Who knows?

Very slight downward revision for intended GDP growth in 2020

2021 will be a very important year for the Communist Party of China with its 100 ^th anniversary of its founding and the first year of the new 5-year plan. For these important reasons, the political leadership of China has to deliver a GDP-growth rate around 6% in both 2019 and 2020.

The official objective of meeting a GDP-growth rate between 6 and 6 ½% in 2019 will certainly be met, probably very close to 6 ¼% (more exactly, my own number is 6.2 %). As regards 2020, an official objective for GDP like “around 6%” or “6% exactly” can be expected. This would mean only a very slight downsizing from 2019. But I cannot imagine any lower goal numbers than these two at this very moment.

Economic policy – (somewhat) more driven by demand-side policy

Chinese officials and economists also frequently point at the fact that the quality of growth is the main issue rather than the pure numbers. This is certainly right in theory and according to economic textbooks. However, it is hard to calculate how the distribution of annual GDP growth between more short-term sighted demand-side policy and more long-term driven supply-side policy really looks like. More transparency in this respect would be good for China as well.

Despite the ambition to conduct a prudent monetary policy, further cuts of the minimum lending rate (MLR) at the People’s Bank of China seem to be on the cards in the next year. In my view, cuts of the MLR tend to be the best signal by growth-worrying political leaders in China.

Anyway, the Chinese clearly want to apply supply-side policy in 2020 as well. The question is rather to what extent. Maybe (somewhat) less than in 2019 – but it still will be there, pushed also by Donald Trump according to the words of Phase One of Trade Negotiations between the U.S. and China (as mentioned in my previous blog from December 14).

Nota bene: For China very necessary parts of supply-side policy are embedded in the trade deal.

Hubert Fromlet
Affiliate Professor at the School of Business and Economics, Linnaeus University
Editorial board

 

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Handelsavtalet mellan Kina och USA- många olösta problem lever kvar

Sammanfattning

Första fasen av det planerade handelsavtalet mellan USA och Kina har nu klätts i ord. Presidenternas underskrifter saknas dock fortfarande. Positivt är att planerade nya tullar från USA:s sida nu har eliminerats och därmed också kinesiska motåtgärder. Å andra sidan bör konstateras att mycket av avtalstexten är alltför allmänt hållet. Många andra områden – för det mesta ännu mer svårbehandlade – återstår att komma överens om i den andra förhandlings- och avtalsfasen. Risken för framtida besvikelser förblir således stor trots detta första steg i rätt riktning.

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In mid-December 2019, the United States and China agreed on the words of the so-called Phase One of their bilateral trade deal, indeed expected for a long time by financial markets and non-financial international corporations. Hope was there several times before – but without seeing results.

For this reason, it does not look as a big surprise that global financial markets initially reacted very positively on the news that Chinese intellectual property treatment, technology transfer, financial services, exchange rates and transparency and also trade enlargement for America among other issues have become part of the first part of the verbally agreed deal. And negotiations in Phase Two are about to start pretty soon.

An important consequence of the trade deal is, of course, that the planned additional taxation of Chinese imports has been canceled at least for the time being. A further American escalation of the trade war has been avoided in the last minute and also probable Chinese protectionist answers. Some de-escalation is in place – but for how long time? However, it should be added that the previous 25% tariffs on American imports from China are not affected by the planned deal since President Trump wants to keep this instrument of pressure during the negotiations of Phase Two.

It should be recognized that China’s “sacrifices” for Phase One of trade normalization seem to be very limited since they are clearly in line with the already anchored Chinese reform objectives both when it comes to cross-border trade and the domestic part of the economy. This may be a forgotten angle as regards the trade deal between the two largest economies in the world. As a matter of fact, the U.S. may have speeded up the Chinese reform process a little bit.

Conclusions – many open issues and unsolved problems left 

¤  Deal still not signed:
All we have by now is the text of the deal. The two presidents still have not written their signatures on the paper. No deal before underwriting!

¤ President Trump feels good right now, as a winner:
On his blog, he wrote on Friday, December 13 on the day of the deal:”We have agreed on a very large Phase One Deal with China. They have agreed to many structural changes and massive purchases of Agricultural Product, Energy, and Manufactured Goods, plus much more…” My view is that President Trump does not want to end this winning feeling very soon; closer to the election, however, the risk for American trade distortions may rise again – particularly after some time of ongoing Phase Two negotiations.

¤  Slight de-escalation better than escalation:
It is not very difficult to come to this conclusion. However, successful negotiations and working agreements must be regarded as a long-term issue in this specific case. A lot of work remains to be done.

¤  Too vague text:
This is one of the real shortcomings of the Phase One text and may lead to  a lot of interpretation problems in the future. Hopefully, Phase Two text will be more concrete.

¤  Many issues hard to interpret and control:
This point is to some extent related to the previous one. Controlling the applications of the first trade deal will be very difficult despite the dispute-settlement institution to be created.

¤  Phase Two will probably become more complicated than Phase One text:
This is an extremely difficult and important point for future trade deals. Many sensitive issues still have to be taken up and included in future agreements between the U.S. and China – among them in Phase Two the enormous Chinese government subsidies to state-owned enterprises and FDI restrictions for foreigners in China.

Finally, I send you the best seasonal greetings!

Hubert Fromlet
Affiliate Professor at the School of Business and Economics, Linnaeus University
Editorial board

 

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