Happy (But Not So Prosperous) Year Of The Pig

Alberto J. Lebrón (Beijing) | The pig, in Chinese culture, has always been a symbol of abundance. Given that the pig is an essential element in their diet – Spain is the country that exports most pork to the China market – explanations abound. But what is significant is that this year of the pig is going to be far less abundant than previous years. The trade war with the US could cut 8 tenths of a point from Chinese GDP (which in the best of cases would grow 6% in 2019). “However, if the US raises the tariffs on all imports from China, as Washington has threatened, it could cost up to two points in GDP”, Wang Tao, chief economist at UBS told Consejeros. In other words, in the worst case scenario, Chinese economic growth would be 5.5% if the US decided to raise all tariffs to 25%.

House prices are expected to fall 6%. Domestic consumption could also fall back a few tenths. In this context, everything indicates further stimuli, both fiscal and monetary. Bank credit is expected to grow 11%. Total infrastructure investment, following a token increase in 2018, will again reach double figures in 2019 (+12%). “With a public debt of about 80% of GDP, there is margin for new infrastructure investment, even if it is recommendable to avoid unnecessary indebtedness,” Wang warns. If we consider other economic agents, it is not only the public administrations: Total debt in China has risen to 240% of GDP.

Stimuli and Reforms

US tariffs, in any case, should incentivise a reform of China´s industrial structure and an increase, step by step, in its competitivity. China, although increasing tariffs on goods coming from the US, is reducing tariffs on the rest of the world. And the trade war with the US, it should be stressed, has precipitated some announcements of reforms. A gradual opening of the financial sector, or the partial privatisation of some state owned enterprises (SOEs), point in the same direction. Inflation, as well, will remain below 2%. This figure, without forgetting the risks derived from excessive indebtedness, offers sufficient monetary margin to counteract a more or less brutal decline in exports (above all to the US). China, according to official estimates, could end 2019 with a current account deficit of 0.1%. And, in fiscal policy, tax cuts equivalent to 1& of GDP have been announced. Cuts in income tax will help to keep domestic consumption growing at 6.8%. It will suffer a slight deceleration, inevitably, because of the jobs that could be destroyed by the trade war with the US. But the reduction in corporation tax, tailored for the private sector, will provide more oxygen for GDP. Liu Shengjun, economics advisor to the Chinese government, explains that “China must build its competitivity on policies which facilitate business innovation, without insisting too much in maintaining wages, or artificially low exchange rates”.

Greater support for the private sector

According to OECD statistics, a large part of Chinese banking credit goes to SOEs, despite being less profitable than the private sector. China´s financial sector, over 60% controlled by state banks, has always been an obstacle for private financing. Traditionally the non-state owned companies have had to use other informal channels of financing, like shadow banking (a parallel system of banking with significantly higher interest rates). But in 2018, give the significant accumulation of toxic assets, the Chinese authorities succeeded in reducing shadow banking credit by 11%.

To avoid the financial strangulation of the private sector, the Chinese authorities have been obliged to approve a series of stimuli to increase credit. The central bank has ordered an increase in loans to private companies. In this sense, the major commercial banks will be obliged to dedicate a third of total credit to the private sector during 2019. A special reduced interest rate for SMEs is also expected. With all of this, forecasts suggest an increase in investment in fixed assets, from the private sector, of around 10%. Public investment, on the other hand, is expected to experience a much more modest increase, of 1% or 2%, in 2019. It is a matter, we will see if successful, of channelling credit to the productive sectors to translate this monetary expansion into effective GDP growth.

Risks and Opportunities

With the objective of compensation for US tariffs, Chinese exchange rates will register an additional depreciation of 4%. But, despite this covert devaluation, the negative contribution of Chinese exports to GDP will be 0.5% in 2019. Some sectors, like the automotive sector, are beginning to show signs of exhaustion. Car sales in China fell 4% in 2018. This is the first fall in the last 20 years. In total, 28 million cars were sold, double that in the US. But the analysts consulted by this journal expect stagnation, or even new falls, in 2019 too. Electric vehicles have increased their market share in 2018, with a more than 60% increase in sales. Clean energy cars, at the moment, only account for 0.6% of Chinese vehicles. Although, in 2025, the Chinese authorities expect this percentage to rise to 20%. All this also offers opportunities to other value added industries, like gas. In transportation, both terrestrial and maritime, the Chinese aspire to replace oil completely with gas. Between 2010 and 2015, CO2 emissions reduced by almost five million tons. Cars driven by natural gas will pass from 1.5 to almost 5 million by 2030. In the major Chinese cities, according to official estimates, gas will account for 10% of total consumption before 2020.

In other industries like telecommunications or the automotive sector, China aspires to be a global leader. Two of the three most sold mobile phones in Spain at the moment are Chinese. Xiaomi, third in contention after the Chinese Huawei, increased its sales by 273% in 2018. And the electric car Qiantu K50, which seeks to compete with Tesla, is expected to arrive in the US after the year of the pig. This would be the first Chinese car brand to disembark in the US. In Latin America, to give another example, Chinese carmakers are expected to dominate the market by 2030. In Chile, sales of Chinese cars have amounted to 16% of the total, just in 2018. In countries like Ecuador, Peru, Panama, Costa Rica, Colombia or Argentina, among others, future expectation of Chinese domination is practically a certainty. Lastly, the plan “Made in China 2025” will continue to be developed on an economic model based on more technology, productivity and R&D. In 2025, the automation of the productive processes through big data, cloud business, blockchain and artificial intelligence should have reached 85% (compared to the current 58%). And it is also expected, among other objectives, to reach a ratio of 100 robots for every 10,000 manufacturing employees (compared to the current 35). At the same time, China will overtake the US as the world´s leading investor in R&D by 2020. And the contribution of the different scientific and technological advances to China´s GDP will reach 60% in 2025. Normally, therefore we would expect GDP growth below 6% in 2020, just after the year of the pig. Even if all this should create the basis for a prosperous next year of the pig, it will in 2031.

About the Author

Alberto Lebrón
Alberto Lebrón is a founding partner of the blog China Capital and director of the programme Direct from Asia on International Radio. He is also an investigative economist for the Peking City University and has been a financial correspondent in the Asia-Pacific region since 2009.