Weblog with daily updates of the news on a frugal, fair and beautiful China, from the perspective of internet entrepreneur, new media advisor and president of the China Speakers Bureau Fons Tuinstra
Financial expert Victor Shih, director of the 21st Century China Center at the University of California San Diego School of Global Policy and Strategy, discusses today’s state of China’s economy at the Centre for Geopolitics with William Hurst, and how it has developed in the 25-year long collaboration between both.
China has started to push capital into its sluggish economy, but economists have different opinions on what the government wants to achieve. According to Arthur Kroeber, author of China’s Economy: What Everyone Needs to Know®, its financial measures are more about stabilizing its economy, not about a full-blown stimulus as it did in the past, he says at the ChinaFile.
Arthur Kroeber:
China’s economic support measures are better described as stabilization than stimulus. Unlike in previous full-bore stimulus programs, for instance in 2008 and 2015, the aim today is not to engineer a boom but simply to halt the deterioration in economic conditions evident in the past few months, and stabilize growth at around the target of 5 percent.
China’s long-term economic strategy has not changed. Xi Jinping’s intent, as outlined in the Third Plenum decision this past July, is to shift capital from real estate and infrastructure into technology-intensive manufacturing. The aspiration is that the productivity gains from high-tech industries will deliver the long-run growth that China needs, offsetting the impact of a declining population and other negative factors. Another key goal of this strategy is to ensure that China becomes self-sufficient in core technologies, enabling it to withstand the pressure of U.S. containment policies. The leadership is fully prepared to tolerate a period of relatively sluggish growth as the price of making this structural shift.
But the stabilization policies of the last month show the limits of this tolerance. They also reflect a judgment that the contraction of the property sector, now into its fourth year, has gone far enough, and that policy should shift from restrictive to modestly supportive. The final policy move, expected in early November—issuance of long-term central government debt to swap for provincial debt—is a long-overdue recognition that the financial position of heavily indebted provinces is unsustainable, and that direct fiscal support from Beijing is needed.
Over the next year or so, the economic package is likely to succeed in its limited aims: reversing the decline in housing sales, and providing local governments with relief from interest payments so they can pay back wages to their employees and overdue bills to the companies that supply them with goods and services. This should be enough to stabilize GDP growth at somewhere close to the 5 percent target. The benefits to the rest of the world, however, will be modest. Neither consumer spending nor commodity demand will enjoy a dramatic pickup. And Beijing’s steady commitment to its investment-first growth strategy means that other countries will still face the challenge of intense competition from low-priced Chinese imports.
Financial analyst Shaun Rein expects the stock markets to rally for another two to three weeks, as Chinese investors return from their holidays and try to gain on the A-shares bump, he tells CNBC. The economy is still a mess, and export is having some problems, but in the short term stock markets will do fine, he says.
Some e-commerce firms in China have profited from a rally of their stocks, triggered off by a major financial stimulus, but that might not help the economy to really improve, says financial analyst Shaun Rein at CNBC. It’s a rally of exuberance, he adds, and might only triple down into the economy in six to nine months. The real problem is for example companies cannot fire their staff very easily, and make their lives hard, hoping they will leave by themselves, he says.
China’s massive financial stimulus is good for the short term, but the economy needs more structural change, away from real estate, says Shanghai-based business analyst Shaun Rein to CNBC. While it is good Xi Jinping moves away from politics and ideology and turns to the economy, more is needed to restore long-term confidence in the economy by the consumers, he adds.
Economist Arthur Kroeber is not expecting a significant stimulus of China’s economy as the central government has done in the past. The government is instead hoping the economy will outgrow the current post-Covid-19 dip without massive intervention, he says at CNBC.
China's government seems eager to control debts, even when it means a mitigation of economic growth. But the financial stimulus will remain a trusted tool in the country's financial toolbox, in case growth drops too far, says financial analyst Victor Shih at the Deutsche Welle.
The Deutsche Welle:
Experts say the Chinese government needs to slow down the pace of infrastructure investment if it wants to resolve the debt problem. But they doubt that the government is willing to push ahead with such a measure.
"Because it [infrastructure investment] already is a large contributor to growth, slowing investment will substantially reduce growth rates," said Victor Shih, an associate professor of political economy at the University of California in San Diego. "This is not what the leadership wants."...
Analyst Shih believes that once China's economic growth drops to a certain level, Beijing would again resort to stimulus to boost expansion. "I still think that if growth falls below a certain level, the top leadership will order a stimulus, which involves acceleration in debt growth," said Shih. "That is the only viable tool in China's arsenal if the economy slows too much."
The People´s Bank of China, the central bank, recently pushed 100 billion Renminbi to its five largest banks to stimulate the economy. But China´s economy rather needs reforms than more capital, argues financial analyst Sara Hsuin the Diplomat.
Sara Hsu:
If China’s economy is to be restarted, it will need more substantive reforms. Labor-intensive manufacturing companies are facing rising costs, including increasing wages, and are moving abroad or diversifying to Malaysia and Vietnam. Chinese workers are becoming more sophisticated and consumption-oriented, seeking higher wages and better opportunities. The leadership is in favor of improving the services and high-tech manufacturing sectors, but appears to be stalled in lifting constraints to growth in these areas.
These constraints abound. In the logistics sector, state-owned enterprises dominate port, rail and air delivery services. The state-owned logistics sectors spans the nation and enjoys an advantage in more regulated logistics areas, such as rail cargo transportation. Similarly, China’s telecommunications industry is dominated by three state-owned enterprises.
Although these state-owned enterprises have recently allowed private enterprises to lease networks, cooperation with private businesses fails to break up the monopoly enjoyed by these large state telecommunications companies. Finally, barriers to growth in creation and manufacturing of innovative high-tech products include a lack of protection for intellectual property rights. Lack of enforcement of intellectual property rights ensures that innovation by private firms may be easily usurped by imitators who produce the same products.
To combat its own malaise, China needs real reforms in targeted industries. In general, the state sector remains too pervasive, and challenges to the growth of private sector enterprises are difficult to surmount. In contrast to what other analysts have asserted, the reform process does not have to be stalled in order to combat slowing growth. Slowing growth can only be addressed in a meaningful way by changing policies to promote employment and the expansion of particular sectors. Economic resuscitation and long-term growth need not, and should not, be mutually exclusive.
