In an indicator of how
important China has become to the world economy, Bloomberg is reporting
this that China’s economy begins 2018 facing what its own leaders call
three years of “critical battles.” Those fights to tackle domestic
debt, poverty and pollution pose a hat trick of risks to the world’s
No. 2 economy even before higher interest rates and trade war threats
from the US are taken into account. While the nation is starting from a
position of strength, with full-year growth in 2017 poised for its
first acceleration since 2010, the expansion is seen slowing in 2018,
Bloomberg says. As a result, the government of Xi Jinping is signaling
that it’s sanguine about more modest economic performance, if progress
on the top risk -- financial fragility -- can be made. "Significant
economic imbalances continue to create downside risk to the outlook for
2018," said Rajiv Biswas, chief Asia-Pacific economist at IHS Markit
in Singapore. "Risks to the Chinese economy will remain among the key
risks to the global growth outlook in 2018, with the Asia Pacific
region particularly vulnerable to the shock waves from a slowdown."
Those waves haven’t materialized at this time, and in fact economic
activity is holding up, Bloomberg says. The official manufacturing
purchasing managers index was at 51.6 in December, signaling improving
conditions. New export manufacturing orders also climbed to a six-month
high, according to a sub-index. The Caixin manufacturing purchasing
managers index, which is more representative of smaller firms, also
showed strong momentum with a reading of 51.5 in December, beating all
estimates. However, these figures "likely are overstating momentum,
particularly in construction," according to a report by Freya Beamish,
chief Asia economist at Pantheon Macroeconomics Ltd in Newcastle, UK
"The profit story appears to be deteriorating, as input price rises
continue to slow." Forecasters see expansion slowing to 6.5% -- the
slowest pace since 1990 -- this year. In its report, Bloomberg
highlights several economic areas that have the potential to trip up
economic growth or spur market turbulence. Chief among these is the
financial sector, recently the focus of the Communist Party which
renewed its pledge to prevent and control financial risk calling it a
pivotal challenge for the next three years. As the financial system
opens further to foreign firms, a debt-to-GDP ratio that’s heading
toward more than 320% by 2022 stands as the main danger. "Even its own
propaganda machine admits that this is such a serious problem that
Beijing doesn’t expect there to be any solution in anything less than
three years," said Pauline Loong, managing director at research firm
Asia-Analytica in Hong Kong. "Financial instability is the core
problem. Solve that and you ease pressure on capital outflows,
complications from deleveraging, weaknesses in smaller banks." A second
area of concern is whether tightening financial and environmental
regulations to help curb debt may cause tremors in 2018 that slow
housing and infrastructure construction, according to Frederic Neumann,
co-head of Asian economics research at HSBC Holdings Plc in Hong Kong.
"A sharper-than-expected slowdown in construction could thus weigh on
broader activity with emerging sectors not yet vigorous enough to
provide a sufficient cushion," said Neumann. "The biggest fault line
running through the Chinese economy is the construction sector." U.S.
policy is another area of uncertainty, especially as president Trump
pushes a turn toward protectionism, says David Loevinger, a former
China specialist at the U.S. Treasury Department. "On the menu for
2018: lots of red meat for the Republican base, and that means bashing
imports," said Loevinger, now an analyst at TCW Group Inc. in Los
Angeles. "Since nationalistic populism is as irresistible in China,
Chinese politicians will feel compelled to retaliate." Also, if the
U.S. Federal Reserve raises interest rates more than markets expect and
tax cuts build on underlying 3.2% growth, the dollar may get a second
wind that puts the yuan and capital outflows under pressure again,
according to George Magnus, an associate at Oxford University’s China
Centre and former adviser at UBS Group AG. "If the Fed starts hiking
and the dollar goes on a bull run, that would cause big problems," says
Christopher Balding, an associate professor at the HSBC School of
Business at Peking University in Shenzhen. Yet another factor is the
degree of tension between North Korea and the United States. Should
this escalate into a more significant confrontation, there will be
profound and far-reaching consequences not just for China’s economy but
that of the entire Asia-Pacific region, says Zhu Ning, deputy director
of the National Institute of Financial Research at Tsinghua University
in Beijing. In fact, there have been suggestions by the administration
that the US is considering still tougher regional policies to increase
pressure on North Korea. So, the outlook for the Chinese economy
seems to be headed for some potential choppiness for the coming year,
in spite of current strength. Of course, this is a high stakes area
producers should watch carefully, even as they follow the evolution of
US trade policy toward North America and the building pressure for
major shifts on NAFTA, Washington Insider believes.
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