China’s economy stabilising but risks lie ahead

Martin Wolf: Doubts linger about President Xi’s commitment to private enterprise

The attitude of Xi Jinping, China’s president, to the private sector “remains rather unclear, to put it mildly”. Photographer: Christophe Morin/Bloomberg

Is the Chinese economy recovering from its slowdown at the end of last year? "Yes," say Gavyn Davies, Goldman Sachs and many others. During my recent visit to Shanghai and Beijing, a number of economists and private businessmen also indicated growing optimism about China's economic prospects. Why do they think this and are they likely to be right?

China has long been the fastest-growing of the world's three largest economies – the United States, the euro zone and China itself. This is so whether one believes in the official numbers for China's growth, or is somewhat sceptical about them. Given its economic dynamism and size, when China sneezes, the world economy catches a cold.

That was happening at the end of last year. According to Fulcrum’s “nowcasts”, cited by Mr Davies, growth fell to an annualised rate of 4 per cent in December 2018. This, he adds, “triggered much of the slowdown in global growth, especially in the trade and manufacturing sectors”.

Behind this slowdown, it is argued, were the tightening of domestic credit, in an effort to halt the leveraging of the economy during the previous 10 years, and the impact on confidence of the trade war with the US.


Now, things look better. Indeed, I was surprised by how cheerful people I met were, especially in Shanghai, China’s financial capital. This greater optimism seems to be in line with the evidence for early 2019. Fulcrum “nowcasts” show recent growth rates in line with the government’s target of 6-6.5 per cent for the year. Similarly, Goldman Sachs has economic growth up to 5.8 per cent in February.

Trade deal

One reason for renewed optimism is the belief that a trade deal with the US is imminent. Another is the loosening of macroeconomic policy. This includes a reform of the value added tax expected to reduce the tax burden by two trillion renminbi annually. In a report on the work of the government, delivered in March 2019 at the National People's Congress, premier Li Keqiang stated: "We will reform and refine monetary and credit supply mechanisms, and employ . . . a combination of quantitative and pricing approaches . . . to guide financial institutions in increasing credit supply and bringing down the cost of borrowing". This could be important.

Of even greater importance, insisted some of those I met, is renewed official enthusiasm for the private sector. In a speech given in December 2018, President Xi Jinping not only paid tribute to Deng Xiaoping, author of China's policy of "reform and opening up", but promised to support the private sector. In his report, Mr Li referred to the private activities 20 times. He stressed the need to "ease funding shortages faced by private enterprises", "encourage private actors to engage in innovation" and "attract more private capital into projects in key areas".

Above all, the premier said: “We will follow the principle of competitive neutrality, so that when it comes to access to factors of production, market access and licences, business operations, government procurement, public bidding and so on, enterprises under all forms of ownership will be treated on an equal footing.” In principle, this should include foreign owners.

The private sector has been the engine of China’s growth. If the authorities are determined to support it, this matters. Quite surprisingly to me, some Chinese people I met were even pleased that the US was pressuring China to liberalise the economy: the better the government had to treat foreign private business, the better it would also have to treat domestic private business. I wonder whether US negotiators understand the implications of letting private entrepreneurs off the state’s leash.

Yet we do also need to challenge this optimistic perspective on the present and future prospects of the Chinese economy.

First, it is unclear whether a deal on trade will be reached with the US. Even if such a deal is reached, the US seems determined to monitor Chinese behaviour, with the intention of imposing penalties (that is, tariffs) whenever China is judged to be backsliding. China seems unlikely to accept this demand. However, if such a deal were actually reached, the trade war would not be resolved, but rather institutionalised. Meanwhile, the EU is getting more hawkish on China’s trade and investment practices. A return to the relations of a few years ago is unlikely.

Credit control

Second, controlling the growth of credit and debt, relative to the economy, while also promoting demand, is likely to remain a tricky, possibly impossible, balancing act. It would not be surprising if policymakers decided they had to tighten credit once again, with damaging effects on the economy. The obvious alternative would be active fiscal policy by central government. But the latter remains remarkably unwilling to do this.

Third, the attitude of Mr Xi to the private sector remains rather unclear, to put it mildly. He is surrounded by people who do believe in the essential role of the private sector. But does he? Most of the time, he seems to put rather greater faith in state-owned enterprises. So long as that is the case, it may be difficult to reignite, let alone sustain, confidence within the private sector.

Finally, there is a question about the true size of the Chinese economy. It may be growing substantially more slowly than official figures suggest. Alternatively, what is growing may not really be gross domestic product as understood elsewhere. Yet these are doubts for another occasion. The question here is whether the economy is recovering and, if so, durably? The answers are: “yes” and “perhaps”. The economy is recovering. But risks, notably over trade, lie ahead. Further periods of weakness are likely. – Copyright The Financial Times Limited 2019