China Macro Reporter
1. 'The State Has Dragged Down China’s Economic Growth': Nick Lardy

<table class="nl_card" id="19apr2701"><tbody><tr><td><table class="multi-block"><tbody><tr><td class="embed-responsive embed-responsive-16by9"><iframe src="" allowscriptaccess="always" frameborder="0"></iframe></td></tr></tbody></table><p class="caption"><a href="" target="_blank">open in a new window</a></p><p class="excerpt"><strong>More insights from Nick Lardy</strong> of the Peterson Institute for International Economics (PIIE) in a <a href="" target="_blank">3m 48s interview on Bloomberg.</a></p></td></tr><tr><td class="nl-post"><h3>⚡<em>Is Xi Jinping’s emphasis on control dragging down the Chinese economy?</em></h3><p><strong>‘President Xi</strong> thinks strong state sector is an element of control.’</p><ul><li><strong>‘And he seems</strong> to be willing to pay a price in terms of slower growth in order to maintain that control.’</li></ul><p><strong>‘The State has been dragging down</strong> China's economic growth over the last few years.’</p><ul><li><strong>‘The share of credit</strong> going to state companies has gone from around 1/3 to over 80%.’</li><li><strong>‘But the state companies</strong> are so inefficient in terms of the way they use capital.'</li><li><strong>Even though</strong> they're getting a lot of capital in the form of loans they're not using it very efficiently.’</li><li><strong>‘So their contribution to growth</strong> is far less than it could be if those funds had gone to private companies.’</li></ul><p><strong>‘But private companies</strong> have gotten squeezed out.’</p><ul><li><strong>‘They has been squeezed out</strong> of credit markets both banks and non-banks and its contribution to growth has declined significantly.’</li><li><strong>‘So, that sector</strong> has been a big drag on China's growth over the last two years.’</li><li><strong>‘Now, China</strong> is trying to get more money into the private sector through a new facility that wasn’t created until of December last year.’</li></ul><h3>⚡<em>‘Would a developed bond market better allocate capital?</em></h3><ul><li><strong>‘Certainly the bond market,</strong> if it was really operating competitively, could allocate capital much more efficiently.’</li><li><strong>‘But what we've seen</strong> in recent years is that state companies have much greater access to that market.’</li><li><strong>‘Private companies</strong> for the most part have had much less access.’</li><li><strong>‘So it still seems</strong> to be like the banking system: preferential access to state-owned companies.’</li></ul><h3>⚡<em>How well has mixed-ownership reform worked to make state companies more efficient?</em></h3><p><strong>‘You can find individual examples</strong> that have been a success, but I think, as a general program, it has not worked, and it's not likely to work. A couple of things to look at.’</p><ul><li><strong>‘The state companies</strong> that are drastically underperforming – the ones that really need to be reinvigorated - are the ones private firms don't want to invest in.’</li><li><strong>‘And</strong> there are a lot of state firms that are doing very well.’</li><li><strong>‘Why should</strong> they want to sell part of their equity to private companies?'</li><li><strong>‘So it’s not quite clear</strong> to me where the fit is, that is, how private capital can really help to invigorate the state sector.’</li></ul></td></tr></tbody></table>

2. U.S.-China trade talks: How Trump’s latest Iran sanctions decision could impact a deal

<table class="nl_card" id="19apr2702"><tbody><tr><td><table class="multi-block"><tbody><tr><td class="bg-holder"><img src="" alt="CHINADebate"></td></tr></tbody></table><p class="caption">Brookings</p><p class="excerpt"></p></td></tr><tr><td class="nl-post"><p><strong>On April 22</strong>, the Trump administration announced that all waivers for buyers of Iranian oil will end on May 2.</p><ul><li><strong>'We are going to zero,'</strong> said Secretary of State Mike Pompeo, adding that there would be no grace period for compliance.</li></ul><p><strong>The US introduced</strong> the sanctions on purchases of Iranian oil after it withdrew last year from the 2015 agreement with Iran to scale back Tehran’s nuclear program.</p><ul><li><strong>But, Washington</strong> later granted 'Significant Reduction Exceptions' waivers to China, India, Japan, South Korea, Italy, Greece, Turkey, and Taiwan that allowed them to continue their purchases.</li><li><strong>Now those countries</strong> have to stop buying Iranian oil or face sanctions themselves.</li></ul><p><strong>China filed a complaint the day after the announcement.</strong> ‘Chinese foreign ministry spokesman Geng Shuang said on Tuesday that Beijing opposed unilateral sanctions and the US’ its “long-arm jurisdiction..’<a href="" target="_blank"> reports</a> the South China Morning Post.</p><ul><li><strong>'We urge the US</strong> to conscientiously respect China’s interests and concerns and not to take mistaken actions that would hurt China’s interests,' said Gang.</li><li><strong>'Meanwhile China</strong> will continue to maintain the legitimate interests of our companies.'</li></ul><p><strong>Some have interpreted</strong> this to mean that China will defy the U.S. and continue to buy Iranian oil.</p><ul><li><strong>‘It is unlikely</strong> that China will zero-out imports of Iranian oil,' says Brookings' Ryan Hass in <a href="" target="_blank">'How Trump’s latest Iran sanctions decision could affect markets and key countries.'</a></li><li><strong>‘China</strong> is the largest buyer of Iranian oil.’</li><li><strong>‘Iran is a key strategic node</strong> connecting Asia and the Middle East as part of China’s Belt and Road Initiative.’</li><li><strong>‘Additionally,</strong> the Chinese are allergic to the appearance of subordinating the conduct of their relations with Iran to the demands of the United States.’</li></ul><p><strong>‘From a U.S.-China standpoint,</strong> the Trump administration’s decision to forego further waivers for China to continue purchasing Iranian oil at diminishing levels will inject stress on the bilateral relationship.'</p><ul><li><strong>‘The current waiver for China</strong> to purchase Iranian oil at reduced levels will expire May 2, concurrent with expected end-game trade negotiations between United States Trade Representative Robert Lighthizer and Chinese Vice Premier Liu He.'</li></ul><p><strong>‘If the United States</strong> sanctions Chinese financial institutions facilitating oil transactions with Iran after the waiver expires, there could be spillover effects on trade negotiations.’</p><ul><li><strong>‘Any unilateral American sanctions</strong> on Chinese financial institutions could limit Beijing’s self-perceived room for compromise on U.S. trade concerns.’</li></ul><p><strong>‘In sum</strong>, by pursuing an all-or-nothing approach with China in lieu of a steady reduction in Chinese imports of Iranian oil, and timing the decision to coincide with high-stakes trade negotiations, Washington could find itself exposed to downside risks with Beijing without offsetting gains,’ concludes Ryan Hass.</p><p><strong>'This might be linked to the trade talks,</strong> but that is hard to know,' <a href="" target="_blank">says Adam M Smith</a>, partner at the law firm of Gibson Dunn & Crutcher, in the South China Morning Post.</p><ul><li><strong>'The move today</strong> definitely could serve as an irritant between Beijing and Washington because, not least of all, China needs energy.'</li><li><strong>'To make China’s importation of energy difficult,</strong> for whatever reason, could be challenging, and China does not like to be susceptible to US jurisdictions, with respect to sanctions, or on anything else for that matter.'</li></ul><p><strong>'I think it’s very unusual timing</strong> in the middle of a supposed 10th round of trade negotiations,' <a href="" target="_blank">says Dennis Wilder,</a> former top CIA China analyst, former special assistant to the President George W. Bush and his senior director for Asian Affairs, now a professor at Georgetown.</p><ul><li><strong>'Does the right hand</strong> know what the left hand is doing?'</li><li><strong>'I would not want</strong> to be Lighthizer or Mnuchin going to Beijing with this.'</li></ul><p><strong>'Is the priority</strong> Iran sanctions or a trade agreement?'</p><ul><li><strong>'A trade agreement</strong> should be the priority.'</li></ul></td></tr></tbody></table>

3. In US-China Trade Disputes, the WTO Usually Sides with the United States

<table class="nl_card" id="19apr2703"><tbody><tr><td><table class="multi-block"><tbody><tr><td class="bg-holder"><img src="" alt="CHINADebate"></td></tr></tbody></table><p class="caption">PIIE</p><p class="excerpt"></p></td></tr><tr><td class="nl-post"><p><strong>You can add</strong> another win for the U.S. to the table, above.</p><ul><li><a href="" target="_blank"><strong>CNBC reports:</strong></a> 'The United States won a World Trade Organization (WTO) ruling on Thursday against China’s use of tariff-rate quotas for rice, wheat and corn, which it successfully argued limited market access for U.S. grain exports.'</li><li><strong>This 'marked</strong> the second U.S. victory in as many months.</li><li><strong>'It came amid</strong> U.S.-China trade talks and on the heels of Washington clinching a WTO ruling on China’s price support for grains in March.'</li><li><strong>[The next post explains</strong> why China won't have to comply - thanks to Trump administration inaction.]</li></ul><p><strong>In fact,</strong> 'the United States generally wins trade disputes, particularly against China, when the case is brought to the World Trade Organization (WTO),' , according to Jeffrey J. Schott and Euijin Jung of the Peterson Institute for International Affairs in <a href="" target="_blank">'In US-China Trade Disputes, the WTO Usually Sides with the United States.'</a></p><ul><li><strong>This conclusion</strong> from the data is at odds with what Trump has asserted in his threats to pull the United States out of the WTO.</li><li><strong>In 2018</strong>, he declared that the WTO was set up "to benefit everybody but us" and added: "We lose the lawsuits, almost all of the lawsuits in the WTO.'</li><li><strong>'The table shows</strong> that Trump’s perception was wrong, at least with respect to China: Over the last 16 years, US officials have challenged Chinese practices 23 times in the WTO; the win-loss record is 19-0, with four cases pending. In the most recent decision, the WTO panel found that China’s agricultural subsidies are inconsistent with WTO rules, upholding US claims.'</li></ul><p><strong>'While 'WTO dispute procedures</strong> work to enforce existing US rights under the world trade rules, some US-China problems fall outside the WTO rulebook.'</p><ul><li><strong>'So there is a strong need</strong> to update international trade obligations to address current disputes over investment, intellectual property rights, and other issues.'</li></ul><p><strong>But, as the next post discusses</strong>, for all its WTO trashing, it's tough to get the Trump administration's attention to reform the dispute resolution process.</p></td></tr></tbody></table>

4. Trump and the WTO: From trashing to crippling

<table class="nl_card" id="19apr2704"><tbody><tr><td><table class="multi-block"><tbody><tr><td class="bg-holder"><img src="" alt="CHINADebate"></td></tr></tbody></table><p class="caption">Reuters</p><p class="excerpt"></p></td></tr><tr><td class="nl-post"><p><strong>Despite U.S. success</strong> with WTO dispute settlement, ‘Trump officials, in keeping with their general hostility toward international organizations, regularly trash the organization,’ <a href="" target="_blank">says NYU’s Peter Beinart in The Atlantic.</a></p><ul><li><strong>‘A 2018 report</strong> from the office of Trump’s trade representative, Robert Lighthizer, declared that “the notion that our problems with China can be solved by bringing more cases at the WTO alone is naïve at best.”’</li></ul><p><strong>‘But it’s not Xi</strong> who is crippling the WTO. It’s Trump.’</p><ul><li><strong>‘According to</strong> a November 2018 <a href="" target="_blank">Cato Institute report,</a> “China does a reasonably good job of complying with WTO complaints brought against it.”’</li><li><strong>‘The Trump administration,</strong> by contrast, has systematically blocked the reappointment of judges on the WTO’s dispute-settlement body and thus, according to <a href="" target="_blank">Reuters</a>, has “plunge[d] the organization into crisis.”’</li></ul><p><strong>‘Nothing illustrates</strong> the self-destructive absurdity of Trump’s behavior better than what happened this March.’</p><ul><li><strong>‘The WTO,</strong> responding to a case brought by the Obama administration, ruled that China must reduce its agricultural subsidies.’</li><li><strong>‘China is appealing</strong> that decision to the WTO’s appellate court.’</li><li><strong>‘But because</strong> the Trump administration has blocked the appointment of new WTO judges, that court may not be able to rule, which means China won’t have to comply.’</li></ul><p><a href="" target="_blank"><strong>Reuters reports:</strong></a> ‘World Trade Organization members are now clear what the United States’s concerns are over how the group settles disputes, but there is no sign of resolution to a crisis that threatens to paralyze the global trade body, said WTO Director-General Roberto Azevedo.’</p><ul><li><strong>‘The United States</strong> has blocked appointments at the WTO appellate body, which hears appeals in trade disputes between countries, threatening the biggest crisis in the 24-year history of the WTO.’<br></li><li><strong>‘The organization</strong> normally has seven members but currently only has three, and two of those are set to complete their mandates in December.’<br></li><li><strong>‘Azevedo said</strong> there would be a significant slowdown of cases and “eventually paralysis down the road”.’</li></ul><p><strong>‘The European Union</strong> has made proposals for WTO reform, agreeing with China, India and other countries on changes to the WTO’s dispute settlement.’</p><ul><li><strong>‘However,</strong> it has struggled to engage the United States on the topic.’</li></ul></td></tr></tbody></table>

5. 'China Growth Outlook': Credit Suisse

<table class="nl_card" id="19apr2705"><tbody><tr><td><table class="multi-block"><tbody><tr><td class="bg-holder"><img src="" alt="CHINADebate"></td></tr></tbody></table><p class="caption">Credit Suisse</p><p class="excerpt"></p></td></tr><tr><td class="nl-post"><p>Our friends James Sweeney and Wenzhe Zhao have shared a terrific report, <a href="" target="_blank">'Global Cycle Notes: Fear tariff fears.'</a></p><ul><li><strong>It covers</strong> a lot more than China (that section is here), and is <a href="" target="_blank">worth a read.</a></li></ul><hr><h2>China Growth Outlook</h2><p><strong>Chinese</strong> manufacturing growth is rebounding.</p><ul><li><strong>Growth should be supported</strong> in the coming months by the restocking of intermediate inventories, improving domestic credit growth, and stabilizing global goods demand.</li></ul><p><strong>Official Chinese production data</strong> has remained typically stable.</p><ul><li><strong>But more reliable Chinese</strong> activity measures such as our bottom-up IP indicator, trade data and manufacturing PMIs suggest production growth likely plummeted to a post-2015 low in recent months.</li><li><strong>Activity collapsed</strong> as trade disputes severely hit business confidence across Asia and manufacturers sharply reduced inventories of imported intermediates.</li></ul><p><strong>Slowing global business capex</strong> [capital expenditure], weaker external demand and deteriorating producer sentiment has also weighed on China's domestic demand.</p><ul><li><strong>Due to self-induced credit tightening,</strong> consumer spending growth has slowed, with particular weakness in auto purchases.</li><li><strong>Policy easing</strong> had not gained enough traction to offset these growth shocks in Q4.</li></ul><p><strong>Since early this year,</strong> trade tension has abated and US-China trade negotiations have resumed.</p><ul><li><strong>China's manufacturers</strong> have started to replenish inventories and imports have partially recovered.</li><li><strong>Global demand growth</strong> has also shown signs of stabilization in the first quarter, and we expect it to reaccelerate due to robust consumer fundamentals in developed economies.</li><li><strong>Chinese exports</strong> are likely to continue improving as a result.</li></ul><p><strong>Domestic conditions</strong> are also likely to improve.</p><ul><li><strong>Fiscal, monetary and credit easing</strong> should trickle down to the real economy through multiple channels.</li><li><strong>Financial conditions</strong> have already eased as institutional deposit (M1) growth - the most sensitive monetary aggregate to policy changes - has accelerated to the highest rate since late 2017.</li><li><strong>Overall credit growth</strong> also improved, driven by lending to households and local governments. Improving home sales should prevent housing construction from deteriorating.</li></ul><p><strong>The positive effect</strong> of current policy easing is likely to be partially offset by the ongoing moderation in manufacturing capex growth.</p><ul><li><strong>However,</strong> metal prices and bulk shipping indices suggest the demand for raw materials remains steady and further weakness is unlikely.</li></ul></td></tr></tbody></table>

6. Caixin PMI has become a leading indicator of global momentum

<table class="nl_card" id="19apr2706"><tbody><tr><td><table class="multi-block"><tbody><tr><td class="bg-holder"><img src="" alt="CHINADebate"></td></tr></tbody></table><p class="caption">Credit Suisse</p><p class="excerpt"></p></td></tr><tr><td class="nl-post"><p><strong>Also from Credit Suisse's</strong><a href="" target="_blank">'Global Cycle Notes: Fear tariff fears.'</a> a discussion of how the Caixin PMI has become a leading indicator of global industrial production.</p><hr><h2>Lead Indicators</h2><p><strong>We do not over-rely</strong> on PMIs to forecast global industrial production.</p><ul><li><strong>They are just</strong> part of the broad set of information we use and lay out in these notes.</li><li><strong>However,</strong> it is worthwhile to survey the various PMIs on occasion to ask which have actually been successfully leading global growth.</li></ul><p><strong>Over time,</strong> it appears that the Chinese PMI has become better at forecasting global growth and the ISM Manufacturing Index has become worse.</p><ul><li><strong>The European PMIs</strong> have consistently been a coincident or lagging indicator.</li></ul><p><strong>Since 2010,</strong> the Caixin Chinese manufacturing PMI has improved significantly as a lead indicator, showing a higher correlation with global IP momentum one or more months later than manufacturing surveys in other regions.</p><ul><li><strong>China’s increasing correlation</strong> should come as no surprise, as its share of global industrial production has tripled from 10% to 30% since its PMI survey was introduced in 2004.</li><li><strong>It is notable</strong> that during the previous two global manufacturing slumps, the Chinese PMI bottomed and started to improve in the months before the trough in global IP momentum.</li></ul></td></tr></tbody></table>