China has seen elevated credit growth since the global financial crisis, such that investors consistently raise this issue as a core concern for emerging markets. The more recent rise of President Trump has also added to the pressure on the world’s second largest economy. A recent visit to China for a number of meetings with economists, academics, and policymakers, has helped develop my thinking on these key topics.
The watchword for China this year is stability. The 19th party congress this autumn, where President Xi Jinping will seek a second term as General Secretary, while various other senior members of the party also jockey for position, means that the energies of the state are principally focused on avoiding any unforeseen disruptions. That includes to the economy.
Thankfully for the party, China’s economy is in something of a sweet spot right now. A commodity upswing, trade strength, and government-backed investment demand should see the 6.5% growth target for 2017 comfortably met. At the same time, the PBoC seems able to raise its policy rates, in order to push back at some of the smaller banks’ funding models, without raising its more important benchmark rates.
When it comes to President Trump’s views on China I believe that, for this year at least, his bark will be worse than his bite. A fully blown trade war between the US and China serves neither side’s overall interests. We might well see some tit-for-tat tariffs introduced, but the broader relationship should remain on course. We may even see some ‘gives’ from China at next week’s meeting of the two leaders in Florida.
Over the medium to long term, however, my view of China is somewhat bleaker. Firstly, it is doubtful that China can somehow dodge economic gravity, following its dizzying rise in debt to GDP: a banking crisis or major growth shock will probably come to pass. Secondly, real estate continues to play too great a role in the financial accounts of Chinese local governments and individuals, and indeed in national growth targets. Thirdly, Chinese SOEs continue to play a distorting role in the Chinese economy, and the current leadership does not seem minded to engage in serious reform on this, or related matters.
I am mindful that the contradictions of a ‘socialist market economy’ mean that China could well keep the show on the road for longer than we expect. Equally, genuine growth upturns in China and Asia should not be ignored by market participants when they occur. But with the above questions on leverage outstanding, allied to the challenge facing China in reforming its impossible trinity (of rates, currency, and capital), a crunch moment seems likely in the next few years.