By John Richardson
SOME people might too quickly assume that last week saw yet more evidence of the reformers and anti-reformers within the Chinese government pulling in different directions.
This was seen to follow on from the Q1 2016 growth of new lending in China, which by one estimate was as much as 58% on a year-on-year basis.
What was equally alarming was that much of this money was thought to have flowed to re-inflating the property bubble and into building even more factories in already oversupplied industries, such as cement.
It seems fair to conclude that the anti-reformers were behind the renewed growth of credit in Q1, which followed on from the success of the reformers, who managed to greatly reduce the availability of new credit in 2014 and 2015.
But I would argue that the jury is still out on the events of last week, which included the publication of a commentary in the state-owned People’s Daily newspaper, in which an unnamed authoritative figure was quoted as saying about the growth of China’s debt:
“A tree cannot reach the sky. Any mishandling [of the situation] will lead to systemic financial risks, negative economic growth and evaporate people’s savings. That’s deadly.”
This commentary was seen as clear state of intent from the reformers, who continue to be led by China’s visionary president, Xi Jinping
But on the very same day alarm bells were set ringing over the continued influence of the anti-reformers, when it was announced that the government is to spend a further Yuan 5 trillion on transport and infrastructure over the next three years.
The detail matters here, though. It depends on where this new money is spent. If it is spent on further re-inflating, say, the real estate bubble, this would be the wrong kind of spending. If it is spent on better bridges and road and rail links between western and China and eastern Chin,a this would be the right thing to do – and perfectly in keeping with President Xi’s economic reforms.
Xi is focused on improving living conditions for the rural half of the country, left behind over the past 30 years. They had average disposable incomes of just $2,000/year in 2015, less than half the urban average of $5,000/year – and most of the rural population lives in western China.
Equally important are the supply side reforms of boosting the consumer economy, whilst closing down oversupplied and highly polluting manufacturing capacity. A great way to boost mobile internet sales, and so of course the consumer economy, is to further improve infrastructure.
Infrastructure in China is often already much better than in the US, where the worrying state of bridges and roads etc. has become an in issue in this year’s presidential election. This helps to explain why anything bought via the internet is 50% cheaper in China than the equivalent product bought from a “bricks and mortar” retailer, compared with just 10% cheaper in the US.
The announcement of more infrastructure spending might also fit with the “One Belt, One Road” initiative – another key part of Xi’s reform agenda. This programme, as yet barely understood outside China, is aimed at recreating China’s historic position as the Middle Kingdom by linking Asia and Africa with Europe, via new rail and maritime versions of the historic Silk Roads.
China is aiming to be in a position to much more cost effectively move raw materials and finished goods both within China itself and to overseas markets. As I’ve discussed before, this has major implications for further growth in commodities and also higher-value chemicals capacities in China.
But there is another layer of complexity. The People’s Daily, in another article published last week, repeated excerpts from a speech made by Xi in January, in which he said that China’s supply-side reforms would not be as painful as those of Margaret Thatcher in the UK and Ronald Reagan in the US in the 1980s. This fits with reports that some of the new infrastructure spending will take place in China’s northeast “rust belt”, where job losses are big because of the rationalisation of oversupplied industries such as steel.
Life used to be straightforward for chemicals companies, as all they had to do to develop a China strategy was to build ever-more capacity overseas to serve the China markets. It was also only necessary to build growth estimates around forecasts of Chinese GDP growth from the IMF, or other third party organisations.
But this no longer works. You instead today need multiple strategies for China that you will need to constantly need to revisit. You cannot afford to cut corners here, no matter the scale of your cost pressures.