The names, in the Chinese calendar, carry no particular symbolic message but the dog, as a domestic animal itself, is well-known for its faithfulness. It is not incompatible with the point that China is loyal to the principles stated by its leaders and is redirecting progressively its economy toward its interior market through its modernization and in satisfying its population demands regarding environment. In 2018, the year of the Dog, following the year of the Cock, growth should continue with a strong rhythm. The point to know if it will “slow” after the 6.9% reached in 2017 to be between 6.5 and 7% of if it will go further at the same rhythm doesn’t make a lot of sense. Statistics, there as elsewhere, do not allow such level of accuracy. China will continue to run the race ahead of developed countries which will have difficulties to grow faster than 2% and will bring, once more, a denial to all these who are forecasting the end of the “Chinese miracle”.
The high level of debt of local authorities and of many state-owned or the parallel financing channels and the “shadow banking” are not capable to generate a systemic risk on the country. International institutions, the IMF in the lead, and the economists failed to forecast the 2007 crisis. It is not surprising they launch warnings in order to avoid to be accused of not being able to assess risks. The State is much less indebted than in most of western countries, not to say a word about Japan. It has at its disposal all the tools to cope with excessive disequilibrium and doesn’t need foreign money to finance itself, to the difference of some members of the eurozone five years ago. Beijing has a structural surplus of its balance of payments and its central bank has accumulated huge foreign currencies reserves which reached 3200 billion dollars. China even became the first creditor of the United States. The Yuan is now considered as a reserve currency and will pursue, in 2018, its step by step internationalization. Bumps, as these occurred at the beginning of February when authorities modified rules regarding foreign investments or as these much more violent in August 2015 which generated a deep fall of Shanghai and Shenzhen stock markets, will not disappear but they are not able to make the Chinese economy leaving the rails. Instead of being the birds of ill omen, observers would be better inspired to take an interest in the current structural changes in the country. They carry opportunities for companies if at least their consequences are analyzed.
The new term used by Chinese leaders during the 19th Congress of the Communist Party to characterize the strategy of the country is “to develop a modernized economy”. China will continue to develop itself and, in the same time, it will modernize its economy. The trend keeps its strength but the engine is changing. It was the message, the close advisor of President Xi Jinping, Liu He, was entrusted to deliver in Davos. Supply-side politics allow enterprises to transform their production tools through the use of the last technologies and to redirect them toward higher quality products in order to meet more and more demanding Chinese customers. The growth of goods and services consumption in 2018 would be above to 10%, equal to 6400 billion dollars. The enterprises are restructuring themselves, notably in the state-owned sector, where they are too many and too much indebted. Foreign investments are not anymore simple de-localizations but intend to produce for the local market. Car producers lead the way and their suppliers are following. BASF, Emerson Electric and BP, for instance, have just announced majors projects. The reduction of the trade surplus in January doesn’t result from a fall of the country competitiveness due to its new industrial strategy. It comes from an atypical increase of inventories before Lunar New Year. February and March figures will correct this calendar blip.
In order to reduce both CO2 emissions and the pollution which affect major cities, Beijing has launched an ambitious energy transition policy. Among renewables, wind turbines have produced 4.8% of the power but 42 TWh have been spoilt due to the inability of the network to absorb them. Nuclear power has not been set aside and in 2018, the merger between China National Nuclear and the biggest engineering group, China Nuclear Engineering and Construction will be completed. It is even possible to see, during this year, the start of the production of the first EPR, built in Taishan and an order for two more units. But the major action is about the reduction of coal dependence and its replacement by natural gas both for domestic use and for power generation. Its consumption increased by 17% in 2017 and is approaching 300 billion m3. It has quadrupled in ten years. Shale gas production is booming, as in the U.S., and has reached 10 billion m3 but it is not enough to meet internal demand. Imports, through Central Asia and soon Siberia gas pipe lines and LNG terminals represent 30% of the total consumption. This share would increase in 2018. As in the nuclear industry, major restructurings are on the way. Shenhua, the giant coal producer has merged with Guodian, one of the biggest utility. The new company has just signed a preliminary memorandum of understanding with the state of West Virginia to exploit a shale gas deposit and to export the natural gas toward to China, which should satisfy Donald Trump.
The year of the Dog will also see an acceleration of the “Belt and Road Initiative” program which intends to put China at the center of globalization trends through the construction of infrastructures facilitating exchanges with neighboring countries, with Europe and even Africa. The Middle Empire, very much attached to its historical references, through the financing of these programs by the institutions it created, will take a double advantage of that policy: its companies will find there a growth support and its neighbors, thanks to the acceleration of their development, will become its partners and its clients. This mercantilist vision of diplomacy is not very different from what was practiced by Great Britain some centuries ago. At a moment when the United States are only thinking to protect and to withdraw into themselves, China has understood that there is a place to takeover, both on the economic and the political scenes. So 2018 will be turning point year. Countries may see an imperialist attitude in this policy. They may criticize it and even fight against it. They will exclude themselves from the project and their enterprises will not take any advantage but that will not interfere with its achievement and trade exchanges with China will continue to accelerate. On the contrary, they can understand that when you have no possibility to reverse a phenomenon, from which, a top of that, you can take profit, it is better to accompany it. Let’s hope that the year of the Dog will be, as France is concerned, the one when will be revised too negative judgments and when French companies will understand the interest they have to consider China as a privileged partner.