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Xi Jinping has issued a rallying cry, but what is China on alert for?

  • Current account deficit, mounting debt, growing hostility from abroad and slowing economy could be among the risks top cadres have been told to keep watch for
PUBLISHED : Tuesday, 22 January, 2019, 11:49pm
UPDATED : Wednesday, 23 January, 2019, 10:27am

A current account deficit, mounting debt, growing hostility from abroad and a decelerating economy – which could hurt China’s political stability – could be among the “black swans” and “grey rhinos” worrying Beijing, analysts said.

They added that President Xi Jinping’s speech on Monday was a rallying cry for the country’s senior officials to fall into line, and to prepare for a turbulent year ahead.

Xi was speaking at the opening session of a Communist Party meeting in Beijing of hundreds of provincial leaders, ministers and top generals summoned to “study and learn” about risk control.

He told the top cadres to stay alert for any “black swan”, or unforeseen, events and to take steps to prevent “grey rhinos”, the predictable but ignored threats.

The president also flagged a list of risks for officials to keep watch for: political, ideological, economic, technological, social and international threats, as well as those from within the party.

He made the remarks as China enters a politically sensitive year, with the 30th anniversary of the Tiananmen crackdown on June 4 and the 70th anniversary of the establishment of the People’s Republic of China on October 1.

Chen Daoyin, a Shanghai-based political scientist, said the emphasis was on external risks.

“By talking about grey rhino risks, the top leadership wants to make it clear that these problems are mainly caused by external factors,” Chen said. “The key message is that the thinking should be united, so that the party can lead the country to prevent these risks or even solve the problems.”

In his speech, Xi said party cadres should ensure China’s “political safety” by improving ideology “guidance”, boosting young people’s confidence in socialism, and dealing with officials who were slack, incompetent or corrupt.

Hu Xingdou, an independent political economist, said: “Politically the risks may not be too big after three decades of robust economic development and a sweeping anti-corruption campaign in the past few years.

“But any risks might be exacerbated by the economic slowdown and tensions over trade and technology with the US and other Western countries.”

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China and the US are more than halfway through a 90-day trade war truce, but tariffs remain in place on billions of dollars of goods on both sides. Washington has said it will go ahead with a threat to increase duties from 10 per cent to 25 per cent on US$200 billion worth of Chinese goods if an agreement is not reached by March 1.

“In addition to exports, one sector that will probably be hit severely is technology,” Hu said. “US chip exports to China may be cut and key technology companies may be hit by sanctions in the US, as Washington takes on Beijing’s hi-tech ambitions.”

Xi also highlighted technology in his speech, including the need to set up national labs and research centres, improve innovation, and push ahead with legislation on artificial intelligence, gene editing, robotics and other areas.

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Recent data show a “significant and increasing downturn” in China’s economy, with annual GDP growth for last year dropping to a near 30-year low of 6.6 per cent, said Brock Silvers, managing director of Kaiyuan Capital, a Shanghai investment advisory firm.

“Beijing has taken stimulus measures, but most analysts still expect China’s economy to continue slowing in the near term,” Silvers said. “Xi’s call for risk awareness reflects Beijing’s reasonable political preparations for expected economic volatility.”

Louis Kuijs, the Hong Kong-based head of Asia research for Oxford Economics, said one key grey rhino event would be the “virtual disappearance” of China’s current account surplus.

“China ran a large current account surplus for a long time, but it has been shrinking substantially in recent years. With import tariffs coming down and the impact of US tariffs starting to kick in, the external surplus is likely to come down more,” Kuijs said.

“This matters because, when thinking about issues such as China’s high debt, we used to take comfort from the current account surplus,” he said.

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“Going forward, I am not arguing that the virtual disappearance is going to lead to a crisis, but it will change the way that the market looks at China and its currency.”

Xi also told cadres to ensure the “steady development” of the property market by “properly” implementing policies and making financing more accessible to small and medium companies.

Alicia Garcia Herrero, chief Asia-Pacific economist for Natixis, said the great rhino would no doubt be real estate.

“The reality is that it is a bloated sector. [It is] bigger than in any other country in the world as a percentage of GDP. But also more leveraged than any other sector in China,” Herrero said.

Chinese authorities have tried to rein in the market without success because it is too big to be controlled.

“Furthermore, any attempt of control ends up with lower growth as this sector is too important. In simple words, the Chinese government is trapped with the real estate sector but the more it grows the bigger the problem it becomes as China’s population is already falling and urbanisation will soon reach its peak,” Herrero said.

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Andrew Tilton, chief Asia-Pacific economist at Goldman Sachs, said getting the level of stimulus right would be difficult this year.

“One possibility [of a grey rhino risk] is if Chinese policymakers are really worried about stimulating too much, the risk is you are doing too little.

“If growth is slowing globally, China is facing a less friendly external environment in terms of being able to export a lot. And if growth is slowing domestically as well then you may need to do more to stabilise growth than what has been done so far,” Tilton said.

Additional reporting by Karen Yeung