Between cronyism and rebalancing in China

Between cronyism and rebalancing in China

Kate Mackenzie

| May 29 12:07 | 5 comments | Share

Chinese premier Li Keqiang on Monday:

China needs growth of about 7 percent to double per capita gross domestic product by 2020 from the level in 2010, Li said yesterday in Berlin after meeting with Chancellor Angela Merkel during his first trip abroad as premier.

Although China has a formal target of 7.5 per cent growth for this year, and that was still kind-of-maybe assumed to be the ongoing target figure for the next few years, no-one was hugely surprised at the declaration of a 7 per cent target.Anyway, the IMF’s forecasting types have decided it might be time to stop clinging to hopes of 8 per cent Chinese growth this year (and 8.2 per cent next year). They cut forecasts for both 2013 and 2014 to 7.75 per cent. The IMF’s first deputy managing director, David Lipton, was in Beijing announcing it on Wednesday, along with other things:

“While China still has significant policy space and financial capacity to maintain stability even in the face of adverse shocks, the margins of safety are narrowing and a decisive impetus to reforms is needed to contain vulnerabilities and move the economy to a more sustainable growth path,” Lipton said.

Strong-ish words. An earlier report suggested Lipton was advising China to both rein in credit growth and step in with fiscal stimulus if it couldn’t meet that 7.75 per cent target.

Fortunately, that rather contradictory message doesn’t seem to have been in the substance of the comments. In fact the press statement from the IMF mission’s conclusion to its Article IV discussions in China yesterday talked about the challenges of rebalancing and a lot of other themes that will be familiar to FT AV readers:

In particular, the rapid growth in total social financing—a broad measure of credit—raises concerns about the quality of investment and its impact on repayment capacity, especially since a fast-growing share of credit is flowing through less-well supervised parts of the financial system. While good progress has been made with external rebalancing, growth has become too dependent on the continued expansion of investment, much of it by the property sector and local governments whose financial position is being affected as a result. High income inequality and environmental problems are further signs that the current growth model needs to change.

The whole things reads rather sensibly, in fact.

The IMF notes that reining in total social financing (broad credit) appears to be a priority, and we’d agree that there have been many indications of concrete action on this from regulators in the past few months. Just this week, the China Banking Regulatory Commission reportedly issued new guidelines on bill financing. This is yet another fast-growing type of credit, according to Nomura’s Zhiwei Zhang: bill financing grew 242 per cent year on year in the first four months of 2013, compared with 63 per cent for total social financing, aka the broadest official measure of credit. There has been action from financial regulators on other fronts already. The problem is that regulating Chinese shadow banking is like playing whack-a-mole; new innovations appear and catch on quickly.

That’s just the financial sector. The other changes which everyone, even China’s leaders, seem to agree are necessary are very challenging indeed. The IMF summed it up:

Our dialogue with the authorities has highlighted three broad challenges for the reform agenda: (1) embedding strong governance in lower-level state or state-related economic institutions, especially the banks, state-owned enterprises, and local governments; (2) continued liberalization and reduced government involvement, allowing a greater role of market forces; and (3) a decisive push for rebalancing toward higher household incomes and consumption.

We’ve mentioned in many posts about China this question of reforms which seem to be necessary for making its growth more sustainable and less reliant on investment and credit.

The newly installed leadership — only officially in position since March — has been making the right kinds of noises, but the question remains how much of this will come to fruition, given that powerful forces — state-owned enterprises, for example — would have to lose their existing advantages. Some observers have pointed to the third plenary meeting of the CCP’s 18th National Congress, in autumn, as a likely time and place for truly substantial reforms to be announced. A recent report from Caixin says that seven task forces have been created to draft reforms for the congress:

The task forces are divided by sectors, namely: finance; the fiscal system; land; production prices; trimming bureaucratic review; the income gap; and the hukou, or household registration, system. Policy suggestions from these task forces will be discussed at the meeting and the reforms are expected to take effect next spring, sources close to the central government said.

It’s China, so we probably won’t know before it happens.

However Capital Economics’ Mark Williams and Qinwei Wang have found cause for optimism about reforms — but it’s mostly in what the Chinese government hasn’tdone:

The clearest immediate sign of new thinking is shown by the government’s decision not to introduce significant stimulus in the face of slowing economic growth. This marks a break from the behaviour of the last ten years when, despite high-level acknowledgement that growth was “unbalanced” and “unsustainable”, policymakers usually responded to slower growth by boosting investment. Premier Li Keqiang reiterated a fortnight ago that the government would rely on market mechanisms rather than stimulus to support growth.

Williams and Wang do however go on to note that on most of the other reform fronts, it’s been more about intentions than concrete commitments. But the strong words, at least, on multiple fronts are also a good sign — for example, liberalising the hukou (household registration) system and introducing fiscal reforms that would channel more central funds to local government, thus defusing a source of opposition to hukou changes.

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 (, 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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