19th Communist party Congress will occur in Beijing October 18th and will designate the country leaders. Without surprise, president Xi Jinping mandate will be prorogated by five more years and the party leadership will be constituted by his devoted supporters. So China political stability is guaranteed which, in a volatile world, is an advantage. Skepticism, frequently expressed in France about the country ability to transform itself and the many predictions regarding financial risks with which it could be confronted have been infirmed. It is true that this autumn political agenda incited authorities to be more vigilant but it is a duty to note that Chinese economy results until now and the progress accomplished in the transformation of its growth model are convincing, even if the last published August numbers have been disappointing for some observers.
With a growth rate reaching 6.7 and 6.9% during the first two quarters, Chinese economy will easily reach its 6.5% objective for the year. Its rhythm is three times higher than in the United States and four times higher than in the eurozone. Since 2008 4th quarter, as an annual average, Chinese growth reached 8.2% when United States and eurozone grew at respectively 1.4% and 0.4% per year. During that period, several structural changes have been accomplished to adapt the country to its internals constraints and to its international economic environment.
Productive capacities are being reduced in heavy industries, companies are mobilized to take advantage of new technologies and services activities are developed to satisfy Chinese consumers demand whose standard of living has dramatically increased. “China as a factory of the world” model, with enterprises being the sub-contractors of major world companies is over. Wage level increase makes Chinese workforce less attractive and the spectacular rise of the standard of qualification in one generation creates new opportunities. The second part of the country structural evolution is the taking account of the constraints generated by environment. The support given to the Paris agreement is not only motivated by a geopolitical logic and the will to get a position on the international scene but is also an answer to local considerations, with the growing pollution affecting China major cities. Essential decisions regarding energy policy have been taken: development of renewable and substitution of coal by natural gas for power generation. The country follows the United States way in extracting shale gas whose production should reach 10 billion m3 in 2017.
Third transformation, China integration in the world economy is the purpose of an intense diplomatic and financial mobilization. The era of huge and growing trade surplus is over due to the reorientation of the growth model. Trade balance will remain with a large surplus as this year with a forecast of 470 billion dollars but it is far lower than the record reached in 2015 with 590 billion. Imports are now growing faster than exports: +22.5% since the beginning of the year compared with last year same period against only +13.5% for exports. Services balance has a deficit of around 100 billion. So, current accounts surplus remains substantial and continues to fill the country currency reserves whose level stays above 3 000 billion dollars. China international strategy marked a turning point five years ago with the launch of the Belt and Road Initiative whose model, the Silk Road, takes its roots in history. Through the financing and the building of infrastructures linking the country to its neighbors in order to stimulate their developments and facilitate the forwarding of its products all around the world, Beijing is winning on all sides: its enterprises are realizing the public works, neighbors countries will become its clients and China foreign trade will profit. The project is even going over its borders since it concerns now Africa and South America. The purpose is to reconstitute the Middle Empire in putting the Chinese economy as the gravity center of world exchanges.
That increased role is going along with the pursuit of the strategy of the internationalization of its currency, the Yuan, which has been recognized in last October, by the IMF as a reserve currency, and the liberalization of its financial markets, with the admission of Chinese company shares in major international index. Chinese company foreign investments have profited of these new regulations and reach, in 2016 a record level of more than 100 billion dollars. China became, after the United States, the second biggest foreign investor. All that didn’t happen without bumps. During 2015 summer, misinterpreted declarations made by the Chinese central bank chairman provoked a fall of the Yuan and a stock market crash which happened after an intense speculation driving up shares prices as what happened in Wall Street with the “Internet bubble”. During the whole 2016 year, households, who had that possibility under some limits, diversified their assets to protect themselves against a possible depreciation of the Yuan, which provoked a fall of the country currency reserves. Many observers thought then that their predictions would realize and that the “Chinese risk” would materialize. The trend was stopped this year because it was the dollar, at the beginning of the spring, which started to decline, financial markets becoming skeptical about the “Trump rebound”. Biggest Chinese companies were also warned by Beijing and the foreign acquisitions wave has been moderated. For years, China had been accused of currency manipulation, notably by the United States through a depreciation policy in order to increase market shares to the detriment of other countries. Beijing today is confronted to the opposite situation and has to intervene to slow the reevaluation of the Yuan.
Does the high level of internal indebtedness constitute a systemic risk as we can read it sometimes? It results from the policy launched during 2008 summer to cope with the financial crisis whose Chinese authorities measured the importance much before Western governments. That debt weighs on local authorities, on many State-owned enterprises and on private investors, in particular in real estate, who elaborated complex schemes to dissimulate its level. But, unlike what happened in 2007 and in 2008 in the U.S. and in Europe, that indebtedness has been financed by Chinese lenders. Banks, and atop of them the central bank, have large enough resources to cope with defaults. That will provoke in some sectors temporary activity falls. But their magnitude will not be sufficient to durably weaken growth and generate social unrests provoked by those who would have lost their jobs. That will not threaten the external position of the country which is a lender to the rest of the world and not a debtor like, for instance, the U.S. and the U.K.
It is a good manner, as just has done the I.M.F., to attract attention on financial risks for Chinese economic agents an excessive indebtedness can generate. But to conclude, against obviousness, that the Chinese economic model is in danger and that its fall is near, when China is succeeding in transforming it, doesn’t make any sense.