Can China tame the ‘grey rhinos’ and ‘black swans’ in 2018?
It’s been a steady year for China’s economy, at least on the surface. After the tumult of 2016, the world’s second biggest economy was no longer seen as a source of immediate concern for global growth, as Beijing tried to keep a lid on volatility.
The country’s yearly headline growth rate barely moved from about 6.9 per cent in 2017. Its foreign exchange reserves meanwhile piled up for the 10 months to November, and the yuan strengthened against the dollar from 6.9 to 6.6. On the markets, the Shanghai Composite Index fluctuated within a narrow range in the past 12 months.
But the economy continues to be dogged by “grey rhino” threats – predictable big risks such as the country’s debt overhang – and “black swans” – risks that are completely unpredictable such as sudden capital flight. Tackling these financial risks has been identified by President Xi Jinping as a top priority for cadres in 2018.
China’s debt mountain in particular is expected to loom large over the economy next year. While it accumulated at a slightly slower pace in 2017, the debt burden is still getting bigger, not smaller.
And while the government tried to reassure the public that everything was under control, there was no shortage of signs that the debt pile-up was taking its toll – the Dandong Port default is just the latest example.
Another worrying sign is that households are racking up debt, in a reversal of the traditional saving habit that goes back centuries in China. This huge behavioural change among the young generation has seen many choosing to borrow instead of save – and this too is likely to have a profound impact on the economy in the future.
Next year, there are likely to be more economic distortions from an intrusive state as Xi – who is now the most powerful Chinese leader since Deng Xiaoping or even Mao Zedong – takes a top-down approach. But sudden interventions introduced in the name of the environment, security and fairness can lead to unintended consequences and disruptions on the ground.
One example is the 2017 push to install Communist Party cells in all businesses, including foreign-funded ones, and to give them a voice in corporate governance. That saw a trade body of German businesses threaten to withdraw from China if the party cells were imposed.
Another case is the winter coal ban to tackle chronic smog in northern China. It led to a gas shortage that left many homes and schools without heating and disrupted production at chemical plants that relied on natural gas as fuel – and resulted in a U-turn by the government.
Meanwhile in many Chinese cities, it is now the government, instead of the market, that decides who can buy or sell property and what the prices should be.
In 2017, the economy has been boosted by double-digit growth in exports as global demand recovers. But this is unlikely to continue in 2018 as China’s major trade partners, notably the United States and European Union, grow increasingly hostile towards Chinese products. Both the US and EU have refused to recognise China as a market economy in the World Trade Organisation, making Chinese exporters vulnerable to anti-dumping investigations and penalties, while the US has officially labelled China as a competitor.
Although the government has made plenty of promises about opening up further – including steps to allow foreign investors to take bigger equity stakes in financial joint ventures – complaints about the business environment in China are getting louder, with the European Chamber of Commerce saying it was suffering from “promise fatigue”.
But Beijing did win some battles in 2017, notably clipping the wings of a few tycoons. The disappearance of a Chinese billionaire from a luxury hotel in Hong Kong early in the year marked the start of a dramatic time for China’s top private capitalists. It saw Wu Xiaohui, chairman of Anbang Insurance, vanish from public view for months; Wang Jianlin, chairman of Wanda, hastily selling off assets; and HNA, which made headlines for its aggressive overseas expansion a year ago, announcing it would pull out of any deals Beijing didn’t like.
The government also tightened controls on the property and stock markets, as well as the yuan exchange rate.
But the structural problems remain. China will continue to face problems stemming from its ageing population and a shrinking labour pool that are the result of its rigid birth control policies. And there are many unanswered questions around Xi’s latest economic blueprint – including how a market system can function in an economy where a powerful state is taking greater control of key resources, money flows, prices and even boardrooms. Given all of these conflicts, expect new grey rhinos and black swans to emerge in China’s economy next year, and beyond.