China Economic Highlights

Andrew Polk
Associate Economist

 

20 May. 2013

(For May 12th – 18th)
Rating for MNC’s: NEUTRAL

Reform rhetoric heats up, but so far “no beef”

Last Monday Prime Minister Li Keqiang delivered his most extensive speech to date on economic policy. In the speech, which was broadcast to officials around the country and later posted on the central government’s website, the premier took a bold tone in underlining the need for economic reform. Going so far as to state that “the room to rely on stimulus policies or government directed investment is not big – we must rely on market mechanism,” and that using government-led investment to drive growth “is not only difficult to sustain but also creates new problems and risks.” The speech has subsequently led to speculation of a major reform push being discussed at the highest levels of government.

We urge China Center members to view these developments cautiously. While it is certainly promising that the rhetoric of reform has been heightened over the past several months – culminating in the premier’s speech last week – several obstacles remain to turning these words into concrete action. Also, of course, implementation effectiveness, if and when concrete policies do emerge, is by no means assured. First, it appears that consensus on the nature that reform should take is still formative, even tentative. Secondly, even once a consensus is reached, designing specific and detailed reform measures will take some time, and the details are likely to be highly contentious. And finally, even if a bold reform agenda is laid out, implementing any measures will require a determined uphill battle against local government officials and SOE leaders who necessarily prefer the status quo environment. We do reiterate that the rhetoric is certainly a positive sign, as it is one necessary precondition for any actual agenda to be put in place. Still, due to myriad vested interests, MNCs in China should temper expectations of actual reform being carried out until concrete signs of progress convincingly emerge. Simply put, statements – and recognition of policy problems – do not equal accomplishment.

Over the past several weeks, economists from investment houses to international regulatory bodies have been downgrading their growth forecasts for China in 2013. After first quarter GDP growth came in lower than expected – at 7.7 percent rather than the consensus expectation of 7.9 percent – and economic indicators underperformed in April, a broad spectrum of China watchers have begun to acknowledge that the steam may be coming out of China’s growth more quickly than many had anticipated. The previous consensus was for 2013 growth of about 8 percent, and expectations have now migrated closer to our projection of 7.5 percent for the year. We highlight this development in order to underline that we continue to see an ongoing deceleration in Chinese growth over the coming five to ten years, and strong signs of this development are beginning to appear. Most observers continue to expect that 2012-2014 may be a soft patch for Chinese growth, but that ultimately growth will stabilize and the “new normal” in China will be average growth rates of about 7.5 percent for the next decade. However, we continue to assert that China’s slowdown is structural rather than cyclical, so members should expect growth to gradually continue to weaken over the coming years.  Our trend growth projection for China for 2013 to 2018 is an average of 5.5 percent.

In the first four months of 2013, fiscal revenue growth in China slowed to 6.7 percent y-o-y compared to 12.5 percent growth in the same period of 2012. The slowdown is connected both with weaker domestic growth (leading to lower business tax receipts) and external growth (causing weaker export taxes as external shipments have been slower than expected). The government has also been working to reduce the structural tax burden on Chinese businesses, which has dampened revenue growth as well. In recent days, media has reported that fiscal reform may be part of the overall economic reform agenda, if and when such an agenda moves forward. Somewhat looser fiscal policy throughout this year should work to partially mitigate the slowdown in headline economic growth. But in the longer run, adjusting the fiscal system will be a key requirement to shift China away from its highly credit-dependent growth model, since local government borrowing to fund revenue short falls is a major driver of credit dependency.

According to a report from E-house China R&D Institute, which was released last week, the average price of land purchased by Chinese property developers was up 21.1 percent y-o-y in the first four months of 2013. The total area of land purchases continued to drop on a yearly basis, down 8.6 percent from 2012 during the same period, but sales are falling at a slower pace than they were earlier in the year. Conversely, the value of home sales transactions fell 13 percent in April from March, according to NBS data, as new purchase restrictions began to bite. The outlook for the overall property sector remains weak, as the government is still determined to keep prices from rising rapidly once again. This may exacerbate an already large inventory of unsold homes, as property developers continue to buy land that local governments need to sell to obtain revenues, even as housing purchases are likely to remain weak. As such, the housing market may eventually face a resumption in sustained downward pressure on prices, especially if developers are forced to cut inventory through large discounts.

The State Administration of Foreign Exchange (SAFE) announced last week that it has moved to simplify rules that govern Foreign Direct Investment into China beginning May 13th. Specifically, the agency has abolished 24 regulations regarding foreign exchange registration, account openings, remittance and conversion. Strong FX flows throughout the first part of 2013, as domestic Chinese companies have engaged the growing carry trade (i.e. borrowing cheaply in dollars and converting to higher-yielding yuan), have once again brought attention to the difficulty of getting money into China – causing many exporters to over-invoice their shipments into Hong Kong in order to obtain dollars that are then repatriated. The newest move may help to reduce the need to skirt various rules surrounding FDI. It is also another very small step toward greater convertibility of China’s currency, but the road toward an open capital account remains very long.