Previous Quarterly Editions
Expropriation Risk: 53 58 60 60 Political Violence Risk: 36 36 38 42 Terrorism Risk: 35 32 32 32 Exchange Transfer and Trade Sanction Risk: 48 48 49 51 Sovereign Default Risk: 40 40 40 39
TREND ▲ OUTLOOK ▲
Even as it grapples with Washington’s unpredictable trade policy and the student-led protests in Hong Kong, the overriding concern for the government in Beijing remains the fact that economic growth is slowing. State figures show that annual growth in industrial output slowed to 4.8% year-on-year in July, the weakest pace since early 2002. The large increase in local government borrowing seen earlier this year is struggling to boost economic activity, just as the stimulus measures targeted at consumers are struggling to boost consumption. With the slowdown in growth is coming a slowdown in hiring, which is especially affecting China's growing population of well-educated would-be professionals seeking to move to Beijing or Shanghai. At the same time, a significant proportion of the labour force in rural areas and small cities is relatively unskilled and working at jobs at risk of disappearing as China moves up the value-added chain. Another worrying trend is the difficulty in recruiting younger workers for the manufacturing sector, where conditions and pay are falling behind the service and delivery sectors; the national average salary in the food delivery sector exceeds that in manufacturing. Meanwhile, the growing trend of migrants returning to rural areas after being priced out of big cities is straining the areas to which they are returning while worsening the urban labour shortage. The resulting anxiety about keeping the economy strong may be contributing to China's insistence on controlling foreign inward investment. Against this background, Beijing continues to be unsettled by US trade policy. In late August, and without apparent warning, President Trump tweeted that the US would raise its tariffs on 250 billion dollars' worth of Chinese imports from 25% currently to 30% from October 1. Raising tariffs has so far failed to get Beijing to accept an unfavourable trade deal, but with each move the economic pressure on China is increasing. Meanwhile, Beijing has had a difficult summer watching the situation in Hong Kong. At the start of September, Chief Executive Carrie Lam formally withdrew the extradition bill that originally sparked months of protests. Beijing will have been troubled by the international impact of the images from the protests, although coverage within mainland China was minimal. It kept Lam in place to take responsibility for responding to the protests while clearly massing its own security forces across the border in Shenzhen. It will regard their non-use as a success, but the Xi government may yet choose to intervene directly if there is more serious unrest, having been encouraged by the relative reticence of Washington, and to a lesser extent Europe, in supporting the protests. In July, Beijing and ASEAN agreed the first draft of a Code of Conduct for the South China Sea, in which four South-east Asian countries and China have conflicting maritime and territorial jurisdictional claims. China wants the final version to be signed by 2021, but ASEAN unease suggests this is unlikely.
TREND ► OUTLOOK ▲
Confusion about US tariff policy continues to complicate the situation for Western companies doing business in China, as does Washington’s approach to Huawei and other Chinese tech companies. Among Beijing’s responses has been to give new powers to the National Development and Reform Commission to screen foreign investments not only on national security grounds but also for 'economic security' concerns, with the ability to limit any foreign investments that could pose a threat to China's economic development.
The police response to the Hong Kong protests was initially restrained until a major confrontation at the airport in mid-August with protesters who had halted flights by occupying the terminal. Subsequent efforts to disrupt the airport were much less effective due to the massive deployments of riot police at major transit hubs and a wave of arrests that indicated a greater willingness by authorities to use force to protect the economy. Protesters then switched to using short strikes, which can cause disruption without providing large gatherings that the police can target. Although the authorities are hoping that the protest movement will begin to fragment now that the extradition bill has been withdrawn, demands for an independent investigation into police conduct will remain a strong rallying point.
The government crackdown in Xinjiang has driven thousands of Uighurs overseas, where a small number have joined militant groups. One Uighur group to emerge from the fighting in Syria calls itself the Turkistan Islamic Party (TIP), with an active membership of around 3,000. Having been involved in some of the heaviest fighting there, TIP has stated its intention to strike at Chinese citizens and interests in retaliation for repression in Xinjiang. While it is unable to do so inside China, it could target Chinese interests working on aspects of the Belt and Road Initiative in places such as Pakistan. In the longer term, China may also become more of a target as its investments in the Middle East increase and it builds relationships with regimes that jihadist groups oppose.
The central bank is encouraging growth by reforming rather than lowering its key interest rate, which has remained unchanged since 2015, but with the same effect of stimulating lending. It is also expected to make further cuts to its reserve requirement ratios soon. The yuan, which has now lost more than 10% of its value against the dollar since the US-China trade war started in April 2018, lost 4% in August alone as Beijing allowed a dip below the psychologically important level of seven to the dollar just as Washington labelled it a currency manipulator.
TREND ► OUTLOOK ▼
Foreign exchange reserves were up slightly in August at 3.1 trillion dollars, despite the impact of the trade war. With debt still rising as growth slows, at some point China will have to sacrifice a portion of its growth if it wants to reduce its debt burden, but it is not clear that the government yet feels the need to do so. The banking system is increasingly well funded, government buffers are high, and the debt is largely held domestically.
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