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AB 2000 studies

Alain Boublil Blog

 

How China is really doing today ?

Just 50 years ago, the Cultural Revolution was starting. It was praised in France, at that time. Alain Peyrefitte, in his book “When China wakes up” concludes that” the Chinese revolution constitutes definitely the most extraordinary experience of the time being … and maybe of anytime”. Valery Giscard d’Estaing commented Mao Zedong death with these words: “a worldwide mind lighthouse has been switch off”.  Since that period, Chinese leaders took their distances in qualifying his records as a success for 70% and a failure for 30% and the People Daily, last week went further:” History has proven that the Cultural Revolution was a complete mistake. It is not and could never be a revolution or social progress in any sense. We will never allow a mistake like the cultural revolution to happen again”. “China has learned its lessons from the decade of tumult between 1966 and 1976 and is now determined to avoid any social unrest that would disrupt national progress. The Cultural Revolution was a major detour in the development path of the Party and the nation. Since introducing the reform and opening-up policy more than thirty years ago, the nation has been growing stronger and people living standards have been improved markedly”.  

So, it is very easy to get wrong when the subject is China, and it is even truer today. Last summer alarmism, following bumps occurred on the Chinese stocks and exchanges markets was not justified, even if the jolts were violent. The new pessimism mood which has developed at the beginning of this year, regarding indebtedness of state-owned companies and local authorities and the fall of currencies reserves was also excessive. When growth rates hardly surpass 1% in Europe, to worry because China growth has slowed to reach only 6.7 or 6.9% does not make any sense. The judgment must be based on China factual and reliable economic figures, on the current structural rebalancing and on its financial situation.

Growth objective for the 13rd plan, which covers the 2016-2020 period, has been put in 6.5-7% range, down from previous Plans with 8% and 7% objectives. But it is misleading to compare this new objective with previous ones when the size of Chinese economy was twice to three times smaller: In absolute terms, the increase of Chinese production will be much more important than in the previous Plans. During 2016 1st quarter, GDP growth was 6.7% with a structure which is changing: consumption on the rise and more oriented toward services, leisure and tourism. Online sales are not anymore the monopoly of the West. They grew by 25% during 1st quarter. Incentives in favor of the car industry, which made a pause last year, with a level of registrations above twenty million units, significantly recovered during the first months of this year months. Energy consumption is peaking due to progress in energy efficiency and the reorientation of growth toward services but China has also benefited from the fall of energy and raw material prices which was favorable to household purchasing power, as in other countries. Trade balance continued to record an enormous surplus, 45 billion dollars per month, since the beginning of the year, the same level than a year ago. These factual data show that nothing justifies the negative opinions we frequently hear. The real challenge, for the country is the rebalancing of its economic structures. China President has set as a priority the adaptation of the production facilities to the new economic needs. 

That means a reduction of clearly identified production capacities, in heavy industries, steel and coal mines notably, and, at the opposite, a policy stimulating innovation and start-ups. In these two areas, figures related to the first months of the year are encouraging. Patent deposits rose by more than 60% and company creations, mainly in the services sectors, by 27%. The 13rd Plan has adopted, which will generate some smiles in France, a supply-side policy, in offering to businesses which go through restructuration, equities to finance it and in providing fiscal incentives to stimulate those which are in a development phase. The second stage of the reforms is related to the international insertion and the break with the “low-cost world factory” model: upgrading the quality of consumption goods to satisfy local more and more demanding clients and launch of the “Belt and Road Initiative”. This new Silk Road, both maritime and through territories, will have major consequences. In building these infrastructures, China supports trade, so growth of the concerned countries, first in Central Asia, but also with Pakistan in the south and Siberia in the north. Trade expansion has always been accompanied with wealth creation. China will find here new sources of development.

So growth is still solid and the structural adjustments are going on. What about financial situation? Local authorities and state-owned enterprises indebtedness is still worrying. That creates uncertainties among investors when their bonds are traded on the market or when their shares are listed. But there is no systemic risk since intervention tools, in the hands of the government are large enough to cope with these problems. Regarding the external situation of the country, it is protected by its huge structural surplus and its currencies reserves, above 3 300 billion dollars. What should we say if China had a 500 billion dollar debt with the U.S? The truth is that we are in the exact opposite situation: it is the U.S. Treasury which has a debt toward China of more than 1 000 billion dollars. The new currency mechanism to determine Yuan parity, which was demanded by the IMF as a condition to grant the Chinese currency a place in the basket used to calculate SDR, has created turbulences which have generated a fall in China People Bank reserves. But their level is sufficient to cope with any eventuality. The accumulation of foreign currencies was the reflection of a time where China was financially isolated from the rest of the world. This time is over. Yuan internationalization is going on and international transactions share of the Chinese currency is continuously increasing. All major financial centers have created platforms to cope with this new situation. At the end of this transition period, which is unavoidably affected by turbulences, China will contribute to the rebalancing of international financial flux and to a better global stability. Regarding the Yuan value, it is by far less volatile than  dollar or yen ones, not to say a word of emerging countries currencies, once more, at the opposite of what was expected last summer.

No country can, in today world, control everything in the same time. There are, of course, imbalances in China, real estate bubbles in some cities, industrial sectors which are confronted with painful adaptations or market fluctuations amplified by the gambling passion of millions of savers. But when we look at facts, and especially, when we compare them to problems occurred elsewhere, twin deficits in the US, crisis in Brazil, weak growth in Europe or secular stagnation in Japan, we have to recognize that the judgment passed on Chinese economy is biased and too negative. To make a long story short, in China, they are “doing much better” than it is currently believed.