China Macro Reporter
1. China's economy back on track - Not so fast

<table class="nl_card" id="19apr2001"><tbody><tr><td><table class="multi-block"><tbody><tr><td class="embed-responsive embed-responsive-16by9"><iframe class="embed-responsive-item" src=""></iframe></td></tr></tbody></table><p class="caption">FT</p><p class="excerpt">Don’t get carried away by the green shoots. Ample data show that Beijing’s targets are increasingly unrealistic.</p></td></tr><tr><td class="nl-post"><p><strong>&lsquo;On Wednesday</strong>&nbsp;the National Bureau of Statistics estimated that the world&rsquo;s second-largest economy expanded 6.4 per cent in the first quarter, compared to the same period last year and ahead of the 6.3 per cent expected according to a Reuters poll,&rsquo; reports the Financial Times&nbsp;<a href="" target="_blank">in an article</a>&nbsp;and&nbsp;<a href="" target="_blank">in a 2m video</a>.</p><ul><li><strong>&lsquo;The figure</strong>&nbsp;matched the 6.4 per cent growth posted in the final quarter of 2018, but was significantly below last year&rsquo;s first-quarter growth figure of 6.8 per cent.&rsquo;</li><li><strong>&lsquo;Eswar Prasad,</strong>&nbsp;economist at Cornell University: &ldquo;There are signs that policy-led stabilisation of growth is beginning to take hold, aided by the abatement of trade tensions with the US.&rdquo;&rsquo;</li><li><strong>Also,</strong>&nbsp;&lsquo;Mr Trump&rsquo;s decision not to increase the punitive tariff rate currently assessed on about half of all Chinese exports on March 1, as he had previously threatened, dissipated much of the negative sentiment that had been weighing heavily on China&rsquo;s stock markets and private sector companies late last year.&rsquo;</li></ul><hr><p><strong>But 'dig beneath the headline data,</strong>&nbsp;and we get another story' on China's GDP, says Chris Balding, one of the leading experts on the Chinese economy and financial markets, in&nbsp;<a href="" target="_blank">'China's Growth Story Has Plenty of Holes'&nbsp;</a>on Bloomberg.</p><p><strong>'Beijing</strong>&nbsp;has been flooding the market with credit, with total social financing up 40 percent so far this year.'</p><ul><li><strong>'Notably,</strong>&nbsp;the source of funds is expanding beyond banks, indicating an uptick in shadow activity.'</li><li><strong>'Yet fixed-asset investment</strong>&nbsp;is up only 6 percent from last year. That means loans aren&rsquo;t heading into areas that will boost the real economy.'</li><li><strong>'Meanwhile,</strong>&nbsp;companies aren&rsquo;t getting paid what they&rsquo;re owed, and account receivables are building up.'</li></ul><p><strong>&lsquo;The consumer side</strong>&nbsp;doesn&rsquo;t look any better.&rsquo;</p><ul><li><strong>&lsquo;Auto sales fell</strong>&nbsp;11 percent in the first quarter from an already tepid 2018.'</li><li><strong>&lsquo;Mobile-phone shipments</strong>&nbsp;slid 12 percent over the same period, compounding a 26 percent tumble a year earlier.&rsquo;</li></ul><p><strong>&lsquo;Households</strong>&nbsp;are clearly feeling the pinch.&rsquo;</p><ul><li><strong>&lsquo;Shoppers</strong>&nbsp;are using their credit cards more, with balances up 23 percent in the fourth quarter from a year earlier.&rsquo;</li><li><strong>&lsquo;And while surveys show</strong>&nbsp;household expenditure rose nearly 15 percent in 2018, there&rsquo;s little left over in the budget for any extras.&rsquo;</li></ul><p><strong>&lsquo;Beijing</strong>&nbsp;has unveiled a standard buffet of fiscal stimulus, credit growth, debt restructuring and consumer-focused tax breaks to boost growth.&rsquo;</p><ul><li><strong>&lsquo;It&rsquo;s debatable</strong>&nbsp;whether any of that will work.&rsquo;</li><li><strong>&lsquo;Public finance</strong>&nbsp;doesn&rsquo;t play out in a vacuum: A tax-cut recipient has the option of saving that money or spending it.'</li><li><strong>&lsquo;Given high Chinese household debt levels,</strong>&nbsp;it&rsquo;s quite likely that windfall will have a much smaller impact on consumption than hoped.&rsquo;</li><li><strong>&lsquo;The same thinking</strong>&nbsp;applies to firms and local governments.&rsquo;</li><li><strong>&lsquo;The more pressing question</strong>&nbsp;might be how much new credit is flowing into financial markets given the rise in stocks and commodities prices.&rsquo;</li><li><strong>&lsquo;A long history of credit binges</strong>&nbsp;is a reminder that Beijing could end up spending a lot of money to accomplish very little.&rsquo;</li></ul><p><strong>'With total inflation</strong>&nbsp;running at around 1 percent, compared with 2.9 percent at the end of 2018, the drop-off in nominal growth is going to push economy-wide leverage significantly higher in 2019.'</p><ul><li><strong>'While Beijing</strong>&nbsp;has abandoned specific growth targets, it still aims for a range &ndash; and even that may not be feasible.'</li><li><strong>'Trying to maintain</strong>&nbsp;six percent-plus real growth in an economy already saddled with debt and excess capacity, one that can no longer depend on current account surpluses of 2 percent to 3 percent, is simply unrealistic.'</li><li><strong>'More than anything,</strong>&nbsp;Beijing may need to reset its own expectations.'</li></ul></td></tr></tbody></table>

2. In China, political control trumps the economy

<table class="nl_card" id="19apr2002"><tbody><tr><td><table class="multi-block"><tbody><tr><td class="bg-holder"><a href="" target="_blank"><img src="" alt="CHINADebate"></a></td></tr></tbody></table><p class="caption">FT</p></td></tr><tr><td class="nl-post"><p><strong>Reading</strong>&nbsp;<a href="" target="_blank">'A trade deal might help China&rsquo;s needed reforms: The non-state sector, not state enterprises, should drive growth,'&nbsp;</a>by the Editorial Board of the&nbsp;<em>Financial Times</em>&nbsp;you might wonder if Xi Jinping has been sitting in Zhongnanhai lamenting his inability to put through those obvious economic reforms but is now rejoicing that Donald Trump may give that needed push.</p><p><strong>Or, perhaps Xi</strong>&nbsp;has another agenda, as suggested by Jonathan Fenby, Chairman of China Research at TSLombard, in his response to the Editorial,&nbsp;<a href="" target="_blank">'In China, political control will always come first.'</a></p><p><strong>Here's</strong>&nbsp;the Point/Counterpoint.</p><table class="intable"><tr><td class="intable-border"><h2>POINT: The FT Editorial Board</h2><p>From the editorial&nbsp;<a href="" target="_blank">'A trade deal might help China&rsquo;s needed reforms: The non-state sector, not state enterprises, should drive growth,'</a></p><ul><li><p><strong>&lsquo;Might Donald Trump&rsquo;s</strong>&nbsp;ill-thought-out trade war with China benefit its victim? The answer is &ldquo;yes&rdquo;.&rsquo;</p></li><li><p><strong>&lsquo;The Chinese authorities</strong>&nbsp;could respond to external pressure by shifting towards competitive neutrality between state, non-state and foreign business.&rsquo;</p></li><li><strong>&lsquo;The result</strong>&nbsp;might then be an economic resurgence.&rsquo;</li></ul><p><strong>&lsquo;In this context,</strong>&nbsp;a trade deal might turn out to be very helpful.&rsquo;</p><ul><li><strong>&lsquo;More equal competitive conditions</strong>&nbsp;would surely promote economic growth.'</li><li><strong>&lsquo;So, increasingly,</strong>&nbsp;would better protection of intellectual property.&rsquo;</li><li><strong>&lsquo;While US insistence</strong>&nbsp;on reducing the bilateral deficit is ridiculous and the proposed one-sided monitoring of Chinese behaviour unacceptable, the argument for revisiting the terms of &mdash; and behaviour under &mdash; "China&rsquo;s accession to the World Trade Organization in 2001 makes sense."&rsquo;</li><li><strong>&lsquo;China could find giving up</strong>&nbsp;its claim to be a developing country helpful to itself, just as WTO accession proved to be back then, even though many officials resisted the idea at that time.</li><li><strong>&lsquo;In its own interests,</strong>&nbsp;China needs to embrace a new round of pro-market reforms.&rsquo;</li><li><strong>&lsquo;Foreign pressure</strong>&nbsp;may be pushing China in that direction.&rsquo;</li><li><strong>&lsquo;But China</strong>&nbsp;will end up the main beneficiary.&rsquo;</li></ul></td></tr></table><table class="intable"><tr><td class="intable-border"><h2>COUNTERPOINT: Jonathan Fenby</h2><p>The letter&nbsp;<a href="" target="_blank">'In China, political control will always come first.'</a></p><p><strong>&lsquo;China certainly</strong>&nbsp;would stand to benefit from economic reforms that could flow from the current trade negotiations with the US (<a href="" target="_blank">&ldquo;A trade deal might help China&rsquo;s needed reforms&rdquo;,</a>&nbsp;editorial, April 15).&rsquo;</p><ul><li><strong>&lsquo;But does that apply</strong>&nbsp;equally to the ruling Communist party?'</li></ul><p><strong>&lsquo;Ever since</strong>&nbsp;he became the country&rsquo;s leader at the end of 2012, Xi Jinping has put the accent on &ldquo;party strengthening&rdquo;.&rsquo;</p><ul><li><strong>&lsquo;The process</strong>&nbsp;continues with the steady expansion of the party into sectors previously left to the government, including economic management, the recurrent references to political weaknesses that led to the collapse of the Soviet Union, and the leader&rsquo;s insistence that &ldquo;government, military, society and schools &mdash; north, south, east and west, the party is leader of all&rdquo;.&rsquo;</li></ul><p><strong>&lsquo;The politburo</strong>&nbsp;does appear to recognise the need for further reform to the economy.'</p><ul><li><strong>&lsquo;But the bottom-line focu</strong>s on political control is likely to restrain readiness to risk change that could chip away at the party state, which this year celebrates its 90th anniversary in power.&rsquo;</li></ul><p><strong>And, Trump's trade war</strong>&nbsp;isn't going to change that agenda.</p></td></tr></table></td></tr></tbody></table>

3. JUST OUT | 2019 OECD Economic Survey of China

<tr><td class="pdf-container"><iframe src=";embedded=true" style="width:100%; height:540px;border:none;"></iframe></td></tr><tr><td class="nl-post"><p class="caption"><a href="" target="_blank">open in a new window</a></p><p><strong>The OECD</strong>&nbsp;has just come out with its excellent Economic Survey of China</p><ul><li><strong>Read</strong>&nbsp;the&nbsp;<a href="" target="_blank">Executive Summary</a></li><li><strong>Read</strong>&nbsp;the full&nbsp;<a href="" target="_blank">77-page report</a></li><li><strong>Review</strong>&nbsp;the&nbsp;<a href="" target="_blank">46-slide presentation</a></li></ul><p>Here are&nbsp;<a href="" target="_blank">'Five Key Insights'</a>&nbsp;from the report.</p><h5>1. A short-term &nbsp;slowdown?</h5><ul><li><p><strong>Although China&rsquo;s economic growth</strong>&nbsp;has slowed, it is still very robust by international standards and contributes to worldwide economic expansion.</p></li><li><p><strong>Consumption is supported</strong>&nbsp;by steady employment growth and rising incomes.</p></li><li><strong>Households are spending</strong>&nbsp;increasingly on items such as e-commerce and shared services. Labour shortages keep wage growth relatively high.</li><li><strong>However, continuing trade frictions</strong>&nbsp;are undermining exports and creating uncertainties. Small and medium-size enterprises are disproportionately affected. A further escalation of import tariffs faced by Chinese exporters would have an even more severe impact on activity, jobs, and corporate earnings &ndash; with a negative impact on the global economy.</li></ul><h5>2. Less manufacturing, &nbsp;more services?</h5><ul><li><p><strong>China&rsquo;s past development</strong>&nbsp;was mainly based on manufacturing production and capital accumulation.</p></li><li><p><strong>However,</strong>&nbsp;this model has run its course and led to misallocation of capital and excess capacity.</p></li><li><strong>Services</strong>&nbsp;are now increasingly driving growth, and not only the financial sector, but also e-commerce or digital services.</li><li><strong>Services</strong>&nbsp;related to international trade and global value chains, such as transport, logistics and computer services, are growing, but would benefit from further liberalisation.</li></ul><h5>3. Is local government&nbsp;debt a threat?</h5><ul><li><strong>Infrastructure investment</strong>&nbsp;is mainly the responsibility of sub-national governments.</li><li><strong>To finance these investments,</strong>&nbsp;local governments have issued large amounts of debt, which have accumulated rapidly and now exceed a third of local output in eight provinces and in two provinces exceed half of it.</li><li><strong>Moreover,</strong>&nbsp;to circumvent borrowing limits, innovative ways to borrow have emerged and the illegal practice of guarantees is continuing.</li><li><strong>This has prompted</strong>&nbsp;the central government to curb such practices.</li><li><strong>However,</strong>&nbsp;the county level is mandated to deliver crucial public services such as education, environmental protection, health and social protection &ndash; with many of these mandates remaining unfunded.</li><li><strong>Recentralising</strong>&nbsp;some of these responsibilities to the central government, which is better funded, would ensure that wages of teachers, doctors and nurses are paid in every locality.</li></ul><h5><strong>4. Is corporate debt</strong>&nbsp;a threat?</h5><ul><li><strong>China&rsquo;s non-financial corporate debt</strong>&nbsp;reaches roughly 155% of GDP, much higher than in other major economies.</li><li><strong>The state-owned enterprises (SOEs)</strong>&nbsp;have been the major group behind the soaring corporate debt: as of end-2017, non-financial SOE debt reached CNY 118.5 trillion.</li><li><strong>This is an increase</strong>&nbsp;of nearly four folds compared to end-2007. In particular, local SOEs have led the debt accumulation, with their debt reaching above 70% of GDP in 2016.</li><li><strong>In contrast to perception,</strong>&nbsp;it is not SOEs in industries plagued by overcapacity that shouldered most debt, but services firms in construction, real estate and transportation industries.</li><li><strong>Many of these SOEs</strong>&nbsp;are in fact local government investment vehicles, implementing urban construction projects.</li><li><strong>In late 2018,</strong>&nbsp;the authorities made it clear in a new document that they will let ailing SOEs and local government investment vehicles exit the market.</li></ul><h5><strong>5. Why break down</strong>&nbsp;internal barriers to trade?</h5><ul><li><strong>Local protectionism</strong>&nbsp;has long prevented the integration of product markets across China.</li><li><strong>Local governments</strong>&nbsp;have protected their market to keep the tax base within their jurisdiction and to stimulate local production of goods and services.</li><li><strong>Most measures</strong>&nbsp;are in residential construction, service procurement, tendering, insurance and medical goods and services.</li><li><strong>They relate</strong>&nbsp;to choosing specified service providers and excluding outside firms from participation in local tenders.</li><li><strong>This has prompted</strong>&nbsp;the central government to order all local governments to undertake self-investigation of measures hindering competition and to eliminate them within a year.</li></ul></td></tr>

4. Why the calculations that led to the trade war are wrong

<tr><td class="bg-holder"><img src="" alt="CHINADebate"></td></tr><tr><td class="nl-post"><p class="caption">Brookings</p><p class="excerpt">More than two-thirds of world trade today takes place within value chains that cross at least one border during production, and often many borders.</p><p><strong>&lsquo;Traditional trade statistics</strong>&nbsp;measure the gross value of trade'&rsquo; says David Dollar of Brookings in&nbsp;<a href="" target="_blank">'How global value chains open opportunities for developing countries.'</a></p><ul><li><strong>&lsquo;When a smart phone</strong>&nbsp;goes from China to the United States, what is recorded as an export is the full value of the phone.&rsquo;</li><li><strong>&lsquo;It would be more accurate</strong>&nbsp;to say that the United States is importing different types of value added from different partners: labor-intensive assembly from China, more sophisticated manufacturing inputs from South Korea, and services from the United States, since even foreign-brand phones have a lot of U.S. technology.&rsquo;</li></ul><p><strong>Miscalculating the 'real effective exchange rate.'</strong>&nbsp;'The real effective exchange rate (REER) may sound arcane to non-economists, but it is one of the most important international financial indices,' say Nikel Patel of the Bank for International Settlements and Shang-Jin Wei, former Chief Economist of the Asian Development Bank, now professor at Columbia University in&nbsp;<a href="" target="_blank">'Getting Exchange Rates Right.'</a>.</p><ul><li><strong>'The REER</strong>&nbsp;is a summary index that tracks the difference in the prices of goods produced by a country and its trading partners.'</li><li><p><strong>'Far from being a theoretical concept</strong>&nbsp;confined to economics textbooks, the REER has significant real-world relevance,' as in the current trade discussions between the United States and China.</p></li><li><p><strong>'Calculating</strong>&nbsp;it more accurately could reduce the risk of misguided economic policies.'</p></li><li><strong>'And it may lead policymakers</strong>&nbsp;to reach some very different conclusions about which measures to pursue.'</li></ul><p><strong>'Central banks</strong>&nbsp;and international financial institutions devote considerable resources to calculating and analyzing it.'</p><ul><li><strong>'But their methods</strong>&nbsp;have become outdated as global value chains (GVCs) become increasingly widespread.'</li></ul><p><strong>'Standard calculations of the REER</strong>&nbsp;by most central banks and statistical agencies assume that countries export only final goods.'</p><ul><li><strong>'But GVCs spread</strong>&nbsp;the different stages of production among different countries'.</li><li><strong>'Ignoring this reality</strong>&nbsp;can lead to substantial mismeasurement of the REER, resulting in questionable policy inferences.'</li></ul><p><strong>&lsquo;To see how the standard approach could be wrong,</strong>&nbsp;consider a hypothetical value chain for the production of smartphones.&rsquo;</p><ul><li><strong>&lsquo;Suppose</strong>&nbsp;Japan manufactures the components and ships them to China, where the phones are assembled and exported globally as finished products.&rsquo;</li><li><strong>&lsquo;Traditional REER models</strong>&nbsp;would assume that Japan exports final goods to China, and that the two countries are competitors.&rsquo;</li><li><strong>&lsquo;A depreciation of the Japanese yen</strong>, therefore, would help Japan&rsquo;s competitiveness and hurt that of China.&rsquo;</li><li><strong>&lsquo;In this case,</strong>&nbsp;however, a weaker yen would lower the price of Japanese components, which may lead to lower prices and increased demand for Chinese phones &ndash; leading to an improvement in China&rsquo;s competitiveness.&rsquo;</li><li><strong>&lsquo;This example</strong>&nbsp;shows that the standard REER calculation is getting not only the magnitude wrong, but also the direction of change.&rsquo;</li></ul><p><strong>'Taking GVCs into account</strong>&nbsp;also alters our understanding of China&rsquo;s bilateral real exchange rate against the US dollar.'&nbsp;</p></td></tr>