CHINAMacroReporter

Shang-jin Wei Presentation-1 | Drivers of Growth Momentum

‘In the last year and a half we saw a spate of government actions all contributed to not just falling stock prices for companies in certain sectors but a deterioration in investor sentiment more broadly. These include:...’
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CHINADebate

December 30, 2021
Shang-jin Wei Presentation-1 | Drivers of Growth Momentum

‘Since I've returned to academia, after serving as Chief Economist at the Asian Development Bank, I don’t follow high-frequency data too much.’  

  • ‘Most of the time I think about low-frequency issues, hoping to discover patterns and regularities that haven’t previously been noticed.’  
  • ‘So my remarks today will be about what I call deciphering Chinese growth momentum through policies, politics, and demographics.’  ·
  • ‘In my view, these are relevant for China’s short-term, medium-term, and long-term momentum.’  

‘Drivers of China's Growth Momentum’

  • ‘Short-term: Domestic policies and reversal of domestic policies.’
  • ‘Medium-term: Geopolitics.’
  • ‘Long-term: Demographics.’

Short-Term: Domestic Policies and Reversal of Domestic Policies.

‘In the last year and a half we saw a spate of government actions all contributed to not just falling stock prices for companies in certain sectors but a deterioration in investor sentiment more broadly. These include:’

  • ‘Stricter enforcement - but also selective - enforcement of anti-monopoly laws.’
  • ‘Very broadly worded data and privacy protection laws and their enforcement.’
  • ‘Stronger, apparently more serious, efforts to control the real estate sector.’
  • ‘Arguably overly zealous implementation of CO2 emission controls.’
  • ‘Anti-addictive measures on apps and games that also certainly not good for the revenue of certain companies but also contribute to less positive investor fundamentals.’

‘We are seeing policy adjustment now in some areas. There are at least broadly two kinds of easing.’

  • ‘One is easing in the sense of looser monetary policies, perhaps complemented by future fiscal policies.’
  • ‘But the other will be easing in the sense of the way regulations and rules and laws are implemented.’
  • ‘And we are seeing the start of easing in both areas now.’

Policy Easing

‘On the monetary side, there's some push to inject more liquidities to the system.’

  • ‘Just a few days ago there was a reduction in required reserve ratio.’

‘On the fiscal side, there's a formal directive from the prime minister to look into ways to accelerate infrastructure investment.’

  • ‘This is something the Chinese government thinks it is good at using, although it now brings diminishing returns.’

Regulatory Easing

‘It is also easing in the implementation of some of the regulations at least.’

  • ‘For example, in the last quarter or so one of the contributing factors to the slowdown in growth was the very abrupt ways of reducing electricity generation, which accounts for something like 45% of the overall energy related emissions.’

‘Many local governments out of a desire to reduce emissions use strong, if somewhat arbitrary, ways to control power.’

  • ‘In the last week or so we see strong criticism within the leadership of that kind of emission control.’
  • ‘We don't know yet, but potentially this could lead to different ways of regulating power generation.’

The Big Questions

‘So we are already seeing some signs of easing. But the big questions are:’

  • ‘Will this continue in the next year or so?’
  • ‘Will easing spread to a broader menu of regulations?’

‘The answers will certainly impact growth in 2022.’

Medium-term: Geopolitics

‘Over the medium term, geopolitics plays an extremely important role in overall growth momentum, but, perhaps as important, sectoral competition.’

  • ‘That is, the same geopolitical tension does not mean the same thing for different sectors.’

‘Potentially some sectors can benefit from geopolitical tension.’

  • ‘For example, those sectors which rely more on domestic consumption, or on domestically- based supply chains might benefit from geopolitical.’

‘Supply Chain Resilience’ and ‘Dual Circulation’

‘The U.S. notion of decoupling to attain supply chain resilience and the Chinese strategy of dual circulation share some important commonalities.’

  • ‘First, each has the effect of reducing dependence and interdependence in specific sectors that country considers crucial.’
  • ‘Second, these policies can make future decoupling and the reduction of interdependence less costly for each side. The more you reduce the interdependence today, the less costly it becomes to take the next step. These actions can be self-reinforcing - and that's a risk.’

‘From investment point of view, it might be worth considering the implications of the differentiated impacts across different kinds of sectors and across different assets types.’

  • ‘And keep in mind: Decoupling and recoupling are most likely going to take place simultaneously.’

Long-term: Demographics.

‘In terms of the long-run factors, demographics is one of the most important forces that will shape the growth momentum of China of the next decades. Two demographic features that are especially worth paying attention:’

  • ‘First China's population is old-people-heavy and getting heavier over time, while growth rate of the working age population and the population overall is declining – that’s well-understood as are the impacts.’
  • ‘Second, but less understood, is China’s gender imbalance – and its profound impact on business and economy, as well as housing prices, asset prices, and so on.’

‘Here's the Chinese population pyramid from the 2020 census.’

‘You can see - compared to other countries, certainly other countries are comparable development level - Chinese old age cohort population is big and, and it’s getting bigger.’

  • ‘And you can also see that, unlike the U.S., Europe, and Japan, China has more males than females – very uncommon because, absent other factors, women outlive men – and the impact of this is less understood, and I will focus on that impact.’

‘China’s peculiar gender structure does not come from the fact that men live longer - Chinese woman also outlive Chinese men.’

  • ‘Instead it comes from fact that, at birth, there are more boys being born than girls.’
  • ‘This is a consequence of gender-selective abortions brought on a strict family planning regulations [the ‘One Child Policy’] that began in the 1980s running into the Chinese traditional preference for boys.’

‘It's been better now than a decade ago.’

  • ‘But this situation is going to continue to deteriorate for another decade or so before it will reverse itself.’
  • [‘Note that China is not the only country that has generational imbalance – so do, for example India and Vietnam - but China’s gender imbalance problems are more severe.’]

‘Family planning policy generates a combination of intended outcomes and unintended outcomes.’

‘The intended outcome is a reduction in birth rate.’

  • ‘But this has led to fewer people entering labor force at the same time parents, grandparents, and grandparents' colleagues are retiring.’

‘An unintended outcome is the gender imbalance, and this, as we will see, has led to:

  • ‘Higher savings rates and lower consumption.’
  • ‘Higher asset values, especially for residential real estate.’

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