2018-04-19 06:29:43
A trade war with America and the battle against debt at home cloud the horizon
JUST a few years ago Wuhan, a sprawling metropolis in the middle reaches of the
Yangtze River, exemplified China s economic woes. Municipal debt had soared.
The most senior local official was known as Mr Dig Up The City , a reference
to his zeal for grandiose construction projects. A movie theme park, intended
as a landmark, closed after failing to draw crowds. It would take nearly a
decade, it was estimated, to sell all of Wuhan s vacant homes.
These days, the city of 11m stands as a monument to China s resilience. Its
economy has accelerated even as the government has controlled debt more
strictly. Five subway lines were opened or extended in the past two years
alone; they are jammed in rush hour. Investment is pouring into semiconductor
production, biotech research and internet-security companies. The glut of
unsold homes is almost cleared.
China s economy, like Wuhan s, is in much better shape than was the case in
late 2015. Then, the country was reeling from a stockmarket crash, suffering
from capital outflows and accumulating debt at an alarming rate. But figures
reported on April 17th showed growth of 6.8% in the first three months of 2018
compared with the same period a year earlier. In nominal terms growth was above
10%. China s total debt-to-GDP ratio has stabilised, a sign that the risk of
financial crisis has receded (see chart).
The improvement in China s fortunes can be traced to three factors. First, the
government has started to tackle several ingrained problems. After a long
period of overproduction of steel and coal, a campaign to close unused capacity
restrained output and pushed up prices. To reduce the property overhang, local
governments bought millions of unsold homes from developers and gave them to
poorer citizens.
In the financial sector, regulators have taken aim at banks murky
off-balance-sheet loans, and at heavily indebted borrowers such as property
developers. Wang Tao of UBS, a Swiss bank, notes that these efforts have given
investors more confidence. Chinese shares listed in Hong Kong have risen in
value by a third over the past two years. The government has also helped
arrange behind-the-scenes rescues of troubled firms. Wuhan featured one of
these. The big local steel company, bleeding cash, merged with its much
stronger counterpart in Shanghai in 2016. The combined entity is profitable.
A second factor is that China s economy is maturing. Growth is bound to slow
over time as China gets richer, but structural changes are also making growth
more stable. Thanks in part to a falling working-age population, which peaked
in 2011, incomes are growing more quickly than the economy is. This, in turn,
is rebalancing the economy. Excessive reliance on investment is giving way to
consumption. And heavy industry is giving way to services, which now account
for more than half of GDP, up from a third two decades ago.
At the same time, China is reaping returns on some big investments of the past
decade, such as high-speed rail in densely populated areas. Qin Zunwen, a
government economist in Wuhan, says that although local debt shot up, it was
almost all tied to the construction of infrastructure half a dozen subway
lines, bridges spanning the Yangtze River, elevated expressways that is now
being used. Yes, it s much more than we had in the past. Has it exceeded our
needs? No, he says.
The final factor has been good luck. Robust growth in America and Europe has
given Chinese firms a lift. After falling in 2016, exports have rebounded. The
rise in global commodity prices has filtered into stronger industrial revenues
in China, boosting miners and metal producers. That has helped them service
their debts. And it has made the task of deleveraging for the broader economy
less daunting. China has curbed outflows of hot money by tightening capital
controls. It has also benefited from a weak dollar since the start of 2017,
which has made the yuan more appealing.
China s coming few quarters are likely to be bumpier, however. The biggest
immediate worry is President Donald Trump. The American administration has
announced tariffs on about $50bn of Chinese exports and may soon triple that.
Exports to America are only a fraction of Chinese GDP, but a trade war between
the world s two biggest economies could wreak havoc on sentiment and supply
chains.
The downsides of the campaign to control debt might also become more apparent.
Last year regulators focused on the financial system, clamping down, for
instance, on borrowing to buy bonds. This year their focus has shifted to
government funding. That will have a more direct impact on the economy. China
has tried before to rein in profligate local officials, but they have found
ways around the rules. A popular recent trick has been to disguise debt in
public-private partnerships. Policy this time seems stricter. Subway
construction has been halted in cities whose finances were too weak. Tighter
liquidity could also weigh on investment. Credit growth is the weakest since
2015.
Over the past decade China s leaders have revved up investment whenever the
economy has slowed beyond their comfort zone. But Xi Jinping, the powerful
president, has often said that the quality of growth matters more than the
quantity. Officials in Wuhan seem to be getting the message. At recent meetings
they have stressed the importance of fostering innovation, cleaning up the
environment and keeping a lid on debt. The test is whether they will still be
singing that same tune as growth turns down.