The Latest on China and What's in Store for 2018

The Latest on China and What's in Store for 2018

China has been one of the fastest growing economies over the last few decades and is now the second largest economy in the world, just behind the United States. However, after years of astronomical economic growth, the economy is currently in the middle of a “managed” slow down, due in large part to Chinese authorities’ desire to avoid the economy overheating. So what is going on in China currently and what is in store for 2018? Head of Economic Research Ricard Torné reports.

China and Poverty

China has been able to pull millions of people out of poverty in the last three decades on the back of astonishingly strong and sustained economic growth. Poverty in China is now mostly concentrated in rural areas, as the benefits of years of stellar growth were unequally distributed in favor of urban areas. Moreover, in contrast to other emerging-market nations, the strict system of household registration prevented the accumulation of millions of people coming from rural areas to the peripheries of urban areas.

Overall, the main difference in tackling poverty between China and most other emerging markets in Asia has been the country’s rapid and sustained economic growth since the “reform and opening-up” policies implemented by paramount leader Deng Xiaoping in the late 1970s. Soaring economic growth boosted the incomes of large swaths of the population, while leaving room for the government to undertake large infrastructure programs. Moreover, China’s one-child policy also prevented the country from seeing a demographic boom that would have added pressure to the labor market. Finally, it enjoyed enviable political stability in recent decades, particularly since 1990, allowing the government to implement long-term policies.

Easing poverty has always been one of the Chinese Communist Party’s priorities, as high and unsustainable levels of poverty could threaten social stability and therefore undermine the legitimacy of China’s single party. Chinese authorities’ main strategy has been to broaden the positive effects of the country’s spectacular economic performance by putting rural areas at the center of economic policies, in particular starting when Hu Jintao took the helm of the government in 2002. The central government provided incentives for companies to move their activities deeper inside the country, while promoting public infrastructure investments outside of big cities.

This process is expected to continue in the coming years, as President Xi Jinping has pledged to eradicate extreme poverty in China by 2020. Boosting government-subsidized homes for rural dwellers, promoting economic activity outside urban areas and increasing loans to low-income people will top Xi’s agenda on poverty reduction.

How Reliable is China’s GDP Data?

The quality of China’s national GDP figure has been called into question many times over the years and although there have been widespread global concerns about the reliability of Chinese data, authorities are slowly implementing measures to improve the quality of such data, especially at the national level. The main headache is statistics at the regional level, where officials tend to manipulate their data to display strong economic growth in their regions.

Tianjin recently raised eyebrows when it announced that its GDP growth figure was actually CNY 665.4 billion after statistical "adjustments". This amounts to a GDP figure about a third smaller than the previously reported CNY 1 trillion.

The announcement in Tianjin follows similar decisions by the Inner Mongolia and Liaoning regional governments and reflects different political priorities compared to the past: President Xi Jinping has signaled that quality is the new economic benchmark, instead of high-speed growth.

This begs the question, it this the end of China’s so-called data-cooking? Not necessarily. Bring reporting irregularities to an end would be an arduous task, as it implies stopping decades of data cooking, especially at the regional level, which was the best way to be promoted within state and party structures. Nevertheless, the central government is already campaigning to delink GDP growth and overall economic performance; the party’s economic guidelines envision a more sustainable economic model, which includes lower growth rate figures.

China’s Transition to the “New Normal”

Data for 2017 is already showing that the Chinese economy is successfully transitioning from an economic model based on investment and manufacturing toward one dependent on consumption and services. Nominal fixed-asset investment decelerated to multi-year lows in 2017, while nominal retail sales remained robust. Moreover, growth in services accelerated, while the expansion in the secondary sector slowed in the same period.

The potential appointment of Liu He as one of China’s four Vice Premiers is another sign of Xi Jinping’s strong commitment to overhaul the Chinese economy and promote a more balanced economic model.

In his few public appearances, Liu has advocated for deeper economic reforms and further opening up of China’s economy and especially the financial system. Moreover, Liu rejects trade protectionism and is in favour of China’s being the main sponsor of global trade. He is also believed to be behind Chinese government’s policies to trim down overcapacity in certain sectors.

National People’s Congress and the Economic Outlook

The One Belt, One Road initiative will continue to be China’s centrepiece of foreign policy and global economic integration. More specifically, this year’s top economic priority will be ensuring financial stability by lowering financial leverage and bringing the overall debt ratio under control.

Chinese authorities will in all likelihood leave the growth rate target for 2018 unchanged at 2017’s 6.5% at the National People’s Congress in March, mostly reflecting last year’s astonishing economic performance. That expected growth target for next year is in line with the 6.5% rate that our panel of more than 45 analysts foresee for this year.

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Photo by Melissa on Unsplash 

Author: Ricard Torné, Head of Economic Research

Date: February 2, 2018

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