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AB 2000 studies

Alain Boublil Blog


How China is doing ?

With the media whirl generated by Donald Trump tweets, England difficulties created by the consequences of its choice in favor of Brexit and the fall in love of the world opinion with the new French president, the actuality relative to China has been relegated in the middle distance. The sovereign debt notation downgrade by Moody’s has had no consequences and the numerous foreign visits of its leaders most of the time followed by the signature of major projects financed by Beijing didn’t attract more attention. At the end of this month, in Dalian, a major harbor located at the extremity of a peninsula north of Beijing, which had been renamed Port-Arthur by the British before being occupied by Japan and by Russia, will occur the “Summer Davos” which will attract many economic leaders. But it seems it has not been noticed in France. The city being the twin sister of Le Havre, let’s hope that will revive the interest of our political leaders and our CEOs.  

The country, whose weakening has been forecast so frequently, is going on its growth path and progressively reorienting its economy in favor of services and internal demand. First quarter figures are above expectations. GDP rose by 6.9% and nothing permits us to suppose that the second quarter will register a significant drop. Power consumption, which is a good indicator of the activity, rose by 6.4% since the beginning of the year compared with last year. This figure is especially important because it occurs at a time when several industrial sectors which are big consumers are going through major restructurings and when the country is reorienting its economy toward services. Their dynamism is still strong and carries different aspects. In Shanghai, 70% of growth results from the development of activities which will make the city the financial hub for the whole Asia. Elsewhere, it is the expansion of tourism. Investments increase in services reached 11.6% since the beginning of the year, representing three points more than total investments during that period. It occurs at a time when the government has launched a process to reduce production overcapacities in the coal and steel sectors. China growth should reach in 2017 the target between 6.5 and 7 % adopted by the government and had taken some advance during the first half of the year.

It is not surprising. President Xi Jinping will have to face a major political event with the Communist Party Congress next fall which will have to renew his mandate for a second five year term. So government action is focused on the success of its economic policy just before that event. Household consumption is accelerating, with the increase of on-line transactions and that growth is rich in jobs creation: it reached six millions, i.e. 220 000 more than during the same period of last year. This favorable environment permits to launch the restructuration of state-owned enterprises. Mergers are investigated between major power utilities, with, as an objective, to support the transformation of the power mix in favor of natural gas and renewable to reduce coal dependence which is the main source of CO2 emissions and pollution affecting major cities.

Critics about the local authorities and state owned enterprises excessive indebtedness have definitely to do with Moody’s decision to downgrade the country sovereign debt. But the huge reserves of the country Central Bank, which have exceeded 3000 billion dollars and which are supplied by the persistent balance of payment surplus, are, for financial markets, a sufficient guarantee. The fact that Beijing is the most important subscriber of American debt with 1000 billion of Treasury Bonds leaves nobody unmoved and brings the proof of the swing of global saving in favor of Asia, and inside China as the first destination. The Chinese currency, since   Summer bumps occurred in 2015 when the clumsiness of China central bank generated a speculative wave, is now stable compared to a currencies basket. The Yuan moderately followed the dollar in its fall during the last three months. Shanghai and especially Hong Kong stock markets enjoy a strong rise since the beginning of the year. Capital outflows, authorized by the current process toward internationalization, which had been interpreted as a sign of defiance caused by the supposed situation of the country, were used, in fact, to finance foreign acquisitions by Chinese company. That alarmed European leaders and they discussed the point during their last Summit in Brussels.

These capital outflows are also benefiting to the development of neighboring countries through the economic and diplomatic strategy known as the “Belt and Road Initiative”. Following the historical reference to the Silk Road, Chinese leaders are encouraging growth of their partners through the financing of major investments programs in infrastructures, which are mostly built by Chinese companies. The country is winning on both counts. On the short term, it gives business to the Chinese industry and on the long term, these countries will become markets and will continue to support their exports. The Chinese economic diplomacy, for four years, is completely mobilized to achieve this vast program which is now reaching Africa and the Mediterranean area. Beijing has even, for that purpose, created a new financial institution, the Asian Infrastructures Investment Bank. It already gathers almost 80 countries which have subscribed to its capital and it directly competes with the World Bank and the Asian Development Bank.

After having become, in one single generation, a major economic power, China is following its way in order to become a major financial power. The internationalization of the Yuan is increasing. During last autumn, the IMF has included it in the basket of reserve currencies. The European Central Bank has just put that official recognition into practice through the acquisition the Chinese currency for an amount equivalent of 500 million euro. It is a first symbolic step. It points many others which will contribute to translate into facts the new status of the Yuan as a reserve currency. Soon after that, MSCI which manages the most important stock market index for emerging markets has included A-shares listed in Shanghai and in Shenzhen. This new step toward the international recognition of Chinese financial assets has given a support to these shares.

Despite systematically alarmist or pessimistic comments, China continues to bring its positive contribution to the world growth. French companies should take notice of that. In the international economic competition as in military battles, alliances are essential. To renounce to find Chinese allies would be a mistake. It is not too late to conclude strategic partnerships or joint-ventures which would benefit to both parties. The “Summer Davos” in Dalian could give them the opportunity.


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