Beijing not without defences

Favourable data improve Chinese government and PBoC positions

The Communist Party of China has always placed a premium on leadership. This month’s ‘two sessions’ – the annual meetings of the National People’s Congress and the Chinese People’s Political Consultative Congress – were a valuable opportunity to pick out the next generation of party chiefs. The meetings served as a test of how well President Xi Jinping has secured his position as ‘the core’ of the leadership.

Xi’s first four years as president have been characterised by an anti-corruption campaign and extensive foreign policy innovations against a background of geopolitical tension and slowing growth. Some have noted Beijing’s apparent hesitancy to implement economic reforms. Though much is still to be done, structural reform remains a continuing process. Stability and predictability endure for the leadership.

The People’s Bank of China, the country’s central bank, is trying to balance asset bubbles with credit growth. China’s leaders are still placing their faith in Governor Zhou Xiaochuan, who has led the PBoC for nearly 15 years. He has helped steer the nation through the global financial crisis, overhauled monetary policy tools and overseen the renminbi’s elevation to reserve currency status.

The central bank and regulators would do well to announce their new policy framework quickly and clearly. China’s credit growth has been fast by global standards and the country is inundated with debt. Corporate debt has soared to 169% of GDP, and Zhou has publicly announced that Chinese banks cannot support firms with high leverage.

Premier Li Keqiang’s policy overview puts emphasis on controlling financial risks, even if this results in slower economic growth. Li’s ‘work report’ announced a 2017 growth target of around ‘6.5%, or higher if possible’. GDP growth targets have been lowered to be in line with the probable economic maximum and the politically-preferred minimum, and data have been positive.

Among the positive signifiers were power generation, which rose 6.3% year-on-year in the first two months of 2017, and freight volume was up 6.9%. Industrial output was up more than 6% in the first two months of the year, and the service sector grew by more than 8%. Data released by the PBoC indicate that new loans in the first months of 2017 totalled Rmb3.2tn ($463bn), down 1.1% from the same period last year.

China’s $9.15bn trade deficit, alongside the government’s decision to lower its growth target for 2017, appears to put the export giant’s trade status in a difficult position. Circumstances may become more challenging in the light of efforts by the European Union to tackle the inflow of cheap Chinese steel and protectionist rhetoric from the US.

If Donald Trump becomes too aggressive with China on trade and imposes import tariffs on Chinese-made goods, Beijing is not without defences. Its main weapon is the renminbi. Pan Gongsheng, director of the State Administration of Foreign Exchange, has said the exchange market will remain stable. The country’s foreign exchange reserves saw a modest rise of $6.9bn last month, reflecting the success of efforts to curb capital outflows.

The rise will help improve confidence in the renminbi exchange rate and offer Beijing more influence in pushing up the value of the currency against the dollar. Fluctuations in the exchange rate in the second half of 2016 were made worse by China’s accelerated outbound investments and the surprising US presidential election result. Though the renminbi is now showing signs of stabilising, pressures from the high levels and expansion of debt in China remain significant.

The irony of a possible devaluation of the renminbi is likely to be lost on the Trump administration, but not on the Chinese leadership.

Adam Cotter is Head of Asia and Chief Representative Singapore at OMFIF.

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