By John Richardson
Li Keqiang was short on detail during a major speech last week, said some analysts. This was taken as a sign that Beijing has become nervous about the pace of the economic slowdown, a theory supported by “policy backtracks” – for example, last month’s decision to lower interest rates for the second time in three months.
Reasonable people can disagree, though, – and I disagree about the significance of the speech, which opened this year’s National People’s Congress meeting.
Li, China’s prime minister, pulled absolutely no punches when, in the same speech, he acknowledged the following problems:
- Growth is sluggish because of weak consumption growth in China and a poor international environment.
- The prices of China’s manufactured goods continues to fall as its costs of production keep on rising.
- “China’s economic growth model remains inefficient, our capacity for innovation is insufficient, overcapacity is a pronounced problem and the foundation of agriculture is weak,” he said.
Can you imagine any Western politician being so frank about the scale of her or his country’s problems? As an aside, I think that this is lack of frankness is one of the root causes of problems in the US and Europe.
The key for me in Li’s speech was that he seemed to underline that nothing has changed since the crucial Third Plenum meeting in November 2012, when China laid out its new direction.
How it gets from Point A to Point B was always going to be a case of trial and error as long term policy initiatives are tested, honed or altogether rejected in favour of other measures.
Equally, it was also always going to be the case that short term steps would have to be taken to lessen the impact of the reform drive – and this is exactly the category into which recent monetary easing falls. These measures are not about changing course, but are instead about limiting the damage to companies and individuals of this new direction.
Another short term step could be a devaluation of the Yuan – perhaps the only means by which the government can hit its target of creating 10 million new urban jobs in 2015.
Whilst disagreeing with me on the Yuan as he thinks that the government’s priority is to keep the currency stable, UK-based metals analyst Simon Hunt agrees with my view that government is putting in place “contingency plans” to prevent an economic collapse.
“It our understanding that these plans are largely in place. In each [industrial] sector, Beijing has chosen companies around which restructuring of that sector will take place, with the weaker companies being allowed to fail,” writes Hunt in his latest China newsletter.
And in the financial sector, he believes that some players are now part of a “bad boys club” that will be allowed to fail, with their assets taken over by large state-owned banks.
We will see the impact of this restructuring on China and the rest of the world later this year, predicts Hunt. I again agree.
Li and China’s president, Xi Jinping, have been in office for two-and-a-half years now and after five years (halfway through their ten-year term), their progress will come under close scrutiny.
So they really have to press ahead with restructuring in 2015 if they are to pass their five-year test for two reasons:
- They have staked their political reputation on these reforms
- If they don’t act soon, it will be too late to get the worst of the damaging effects out of the way before their five-year review takes place.
This leads me to today’s chart at the beginning of this post, from the UK-based macroeconomic consultancy, Fathom Consulting.
It shows that last year’s real GDP growth was not the official rate of 7.5%, but around 5%, or perhaps even lower.
This is based on the consultancy’s “China Momentum Indicator”, which measures rail freight, electricity and banking data – and is in line with the arguments I was making last year about China’ s real levels of growth.
You can only conclude that real growth is set to be even be even lower in 2015 and beyond as the reform process accelerates.
This enables you to draw something else from Li’s speech last week: The government’s target of GDP growth of “around 7%” for 2015 is very unlikely to be achieved – and so should not be used to help calculate rates of chemicals demand growth in China for the country as a whole.