Policy battle rages in China as slowdown feeds ‘sense of crisis’

Policy battle rages in China as slowdown feeds ‘sense of crisis’

Anti-reform hardliners in China’s Communist Party have become seriously alarmed by the sharp slow-down in economic growth, creating a “task-force” to crank up production.

China’s Caixin Magazine reports that there is a growing “sense of crisis” not felt since the depths of the global banking crash in 2008-2009. Photo: Quirky China News / Rex Features

By Ambrose Evans-Pritchard

4:17PM BST 06 May 2013

China’s Caixin Magazine reports that there is a growing “sense of crisis” not felt since the depths of the global banking crash in 2008-2009. The State-owned Assets Supervision and Administration Commission (SASAC) has assembled a team to “protect economic growth” and pressure state companies to boost jobs at all costs.SASAC is the bastion of vested interests and controller of 115 state behemoths with assets above $6 trillion and lock on much of the economy.

The move comes amid further signs that growth is faltering across all fronts. HSBC’s gauge of Chinese services fell three points to 51.1 in April, the lowest in almost two years.

The broader composite index also dropped sharply to a six-month low of 51.1 and is now barely above the contraction line, with new orders trailing badly. The economy grew 7.7pc in the first quarter, slower than expected.

The Shanghai index of stocks rolled over in early March and has given up the half the gains since the rally started late last year. It has dropped almost 60pc since its peak in 2008 and is now trading at levels comparable to 2003.

China’s downturn is rippling through commodity markets, led by a major sell-off of base metals this year. Credit Suisse said the short-covering rally over the last few days is likely to prove a “dead cat bounce” as China’s structural slow-down and a weakening global economy overwhelm all else. It expects copper to “bite the dust”, falling to 2009 levels near $6,000 a tonne.

China’s authorities have been trying to stop property speculation with loan curbs but it is proving hard to pop the housing boom without popping the economy itself.

New so China’s growth task-force comes amid reports that SASAC has ordered state firms to go for expansion and disregard other objectives such as investing in new technology.

The policy drive cuts across efforts by the reformist premier Li Keqiang to wean China off uber-growth and shift to a different development model. He has asked China’s State Council to study ways to cut growth to 7pc next year, deemed the safe speed limit.

Resistance from SASAC is thwarting his efforts to reduce Beijing’s stifling control over production. State firms have grown fourfold since 2003, meaning that the economy is being renationalised. The unreformed behemoths gobble up most of the available bank credit even though many are loss-making, or are grossly inefficient.

Mr Li was a key sponsor of a report last year by China’s Development Research Council and the World Bank warning that the country has already picked the low-hanging fruit of catch-up growth and can no longer rely on cheap exports and imported know-how.

The report has become the policy Bible for reformers. It said China risks languishing in the sort of “middle income trap” that has ensnared much of Latin America and the Middle East at different times, unless it embraces the free market and fosters bottom-up thinking.

“The forces supporting China’s continued rapid progress are gradually fading. The government’s dominance in key sectors, while earlier an advantage, is in the future likely to act as a constraint on creativity,” it said.

“The role of the private sector is critical because innovation at the technology frontier is quite different in nature from catching up technologically. It is not something that can be achieved through government planning.”

Mr Li faces powerful resistance from entrenched interests and those in the Politburo who fear that China risks a social explosion unless it keeps the economy on steroids.

Pressure is building for yet another burst of easy credit, even though the “economic efficiency” of debt is collapsing. The output gained from each extra yuan of credit has fallen from a ratio of 0.8 to 0.35 since 2008, a warning sign that the cycle has played out.

Fitch downgraded China’s debt in April, warning that credit has already jumped from 125pc to 200pc of GDP in four years, much of it in shadow banking. While another burst of loans may boost growth in the short run, it risks storing up ever greater problems.

President Xi Jinping has yet to tip his hand in what amounts to a civil war over policy and China’s economic destiny. Experts say he tilts back and forth between the reformist and dirigiste wings of the party. The Standing Committee appears evenly split.

The International Monetary Fund warned last week that China is in danger of becoming “old before it is rich” as the demographic crisis hits. The work-force has already begun to shrink, contracting by 3.5m last year.

The IMF said China and other emerging economies in Asia must embrace the rule of law, sound institutions, credit reform, and “limited government involvement in the economy”, or risk falling into the middle income trap.


About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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