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China’s president highlights ‘new normal’ of economic growth

Economic growth, Financial Events
By Paul Hodges on 13-May-2014

China lend May14

China’s President Xi Jinping became the first world leader to highlight the move into a “new normal” at the weekend:

China is still in a significant period of strategic opportunity. We must boost our confidence, adapt to the new normal condition based on the characteristics of China’s economic growth in the current phase and stay cool-minded”

“Through innovation and technological development, the country should push for the transformation from “Made in China” to “Created in China,” from “China speed” to “China quality” and from “Chinese products” to “Chinese brands.””

Xi’s speech highlights the 180 degree change in policy under the new leadership.

Reform of China’s financial sector is now moving forward at a fast pace.  This confirms the analysis of the blog’s first ‘Your Compass on China’ Research Note in March (produced in association with leading Hong Kong-based financial advisory firm Polarwide):

  • Last month, the government opened 80 projects in state-run sectors to private investors,  as forecast in the Compass note
  • This month, it announced that 121 state-owned companies would have to increase the dividend payable to the government, also as forecast

Today we publish the second note in the ‘Your Compass on China’ series, ‘China Accelerates its Reform of the Financial Sector’.   It highlights how the government is now aiming to make access to capital easier for healthy companies, and more expensive for problem firms, whether they are state-owned or private:

  • Developments in Alibaba’s online money market fund “Yu’E Bao” and in shadow banking have acted as catalysts to speed up the pace of reform
  • Yu’E Bao has become China’s largest money market fund with 81 million investors, and deposits of  Rmb 540bn ($87bn) – after just 10 months
  • There is a growing awareness that the size of the shadow banking sector creates major risks for the wider economy

Thus deputy central bank governor Liu Shiyu warned at the weekend that “Shadow banking threatens to undermine the financial system“, adding that there was a need

For tougher rules to control an industry that’s driven up borrowing costs and done little to support the economy and productivity“.

Moving from a state-directed system to one where major forces play a decisive role is a major challenge.  But the opportunity is even bigger.  The creation of a more “level playing field” with regard to access to capital will make it easier for companies to invest and grow in China.

Please click here to download a free copy of the Note.