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AB 2000 studies

Alain Boublil Blog

 

2017 : the China year ?

Nothing happened in 2016 as expected. The Chinese economy didn’t fall into a major crisis. Its currency, the yuan, as its financial markets, stabilized after the previous summer bumps. Growth, even if it has been lower than in the past years, was still strong, at around 6.5%. This figure would make envious most of the emerging countries, not to say a word about developed ones. National debts, and notably state-owned enterprises and local authorities ones, have been refinanced without affecting the banking sector. Trade surplus and the central bank huge reserves protect the country from any wariness coming from foreign markets. All the countries cannot say the same.

Nothing happened as expected also in the developed world, except maybe in Europe where it seems impossible to overcome divisions. Against any expectations, the United Kingdom has decided to exit from the European Union, which has generated a fall of the pound much more important than the one which had affected China a year earlier, and the United States has elected a non-conformist and unpredictable president. The 2017 year, due to the coming elections, will not bring significant progress in the solving of the European crisis. “Brexit” negotiations are going to be so long and complex that is unlikely we get, as soon as this year, a simple roadmap giving indications about the relationship between both parts. Regarding American policy, it will reflect the character of the new president. It is useless to try to forecast it. So, it is likely that the most important stability factor and the best visibility will be in China, where, during the next congress of the Communist party, in November, the current mandate given to the president Xi Jinping will be confirmed. It is not in the tradition of the country to venture ahead of an important political event.   

It is frequently suggested, as an answer to the current difficulties which are affecting some countries, including France, to proceed with structural reforms. It will be, in fact, one of the major issues raised during the next presidential campaign. Despite a general skepticism, China, for four years, has taken the lead in that matter, with measures whose importance has no equivalent in the world and whose audacity makes us reminding policies followed by Deng Xiaoping, at the beginning of the Eighties, amid general indifference. The objective is definitely to change the status of the Chinese economy, to move from an emerging one to a developed country, open to the world and which, by its size, will more and more weight on the international scene. It should be wrong to underestimate its chance to succeed, and, its consequences.

Among the reforms, the first one is the financial opening of China on the world scene, with the steps, cleared one by one,  in direction of the internationalization of its currency, with the building, in Shanghai, of a major financial center which will takes the role, until now, played by Hong Kong and with the gradual liberalization of capital flows. Start has been bumpy, we remember the panic provoked during 2015 summer, when stock market fell, after two years of a frantic speculation. But it was not an unprecedented case. Let’s remember the internet bubble collapse in the West at the beginning of the Twenties. Contrary to the alarmist forecasts, the Yuan didn’t crash and if its parity against the dollar fell, it is due to the rise of the American currency against all the others, as a consequence of the anticipation of future monetary policy decisions expected from the Federal Reserve. Against the euro, the Yuan didn’t vary a lot.

The second set of reforms, and they are big enough, intends to redefine the country relationships with its foreign environment and to shift its growth model. Time when the country was satisfied in being the “plant of the world” and when its enterprises were the sub-contractors of great multinationals is over. This model has reached its limits. Wages rise makes it less competitive and, on top of that, qualification upgrade and the access to the new technologies allow Chinese enterprises to be more ambitious. China has to find, it is its turn,  suppliers, new partners and customers. It is what is at stake with the huge new program “Belt and Road Initiative”, launched two years ago which consists in financing and in participating in a massive investment program in ground and maritime transport infrastructures in neighboring countries. The country will become again the Middle Empire and will take advantage of the economic consequences. It is “external Keynesianism”. Major Chinese companies will find there a handover helping them to cope with the slowing of their local activity. This “joint-prosperity” area, China is building and which includes Russia, makes us to remember the strategy Germany developed after the fall of the Berlin Wall, when it transformed former political satellites of Moscow into its own economic satellites.

The third set of reforms consists in the rebalancing of the economy inside the country. It is on the way. New engines for growth are needed. Household equipment in manufactured products has jumped and the middle class, and especially the young, has now other appetites, health, leisure and travels. Painful restructuration will affect heavy industries which will not be able anymore to offset the stagnation and even the reduction of the size of their markets by exports. Year 2017, due to the political agenda, will be a transition year but the commitment of the political power seems to be strong. It appears, for instance, in the energy policy with the increase of the number of the closure of coal mines, the planned stagnation of the coal production and the transition around major cities toward a fossil fuel which emits less CO2 and particles and which is less damaging for the environment: natural gas. Consumption rose from 50 billion cubic meters in 2005 to 200 in 2015. Forecast, for 2020 are around 300 billion cubic meters. Millions of new household units are connected each year, which eliminate emissions resulting from wood combustion. Natural gas power plants replace coal ones. Shale gas exploitation has started and the building of gas pipe-lines and networks is accelerating. This sector, along with tourism is the fastest growing in the country. We would like to find, in Europe, where we like to give lessons about the reduction of emissions, such a commitment.

The last reforms are, maybe, those which will have, on the long term, the most important consequences: they concern the Chinese society, with the abandon of the one-child policy and the liberalization of internal migrations. The transformation of the country is mainly based on a generation effect. Young are living differently and better than their parents and, even more, their grand-parents, at the opposite of what we know in France and in Europe. This is a major factor of stability since it is difficult to imagine parents rebelling against their own children. It is also for that reason that in a very uncertain 2017 world, the most important threats will not come from China.

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