Previous Quarterly Editions
Expropriation Risk: 58 60 60 62 Political Violence Risk: 36 38 42 43 Terrorism Risk: 32 32 32 32 Exchange Transfer and Trade Sanction Risk: 48 49 51 50 Sovereign Default Risk: 40 40 40 40
TREND ▲ OUTLOOK ▲
China heads into the new decade with efforts to strengthen its economy still linked to relations with the United States. Beijing does not regard the recent US restrictions on technology exports and Chinese investment as a temporary move only associated with the Trump administration. Instead, it sees a permanent switch in Washington to a bilateral relationship shaped primarily by national security concerns and a heightened sense of geostrategic competition. As such, it expects little change if a Democrat wins in November. To reach a deal that limits the impact of Trump’s tariffs, in December President Xi Jinping was prepared to make some concessions on intellectual property protection, market access, and bulk purchases of US farm produce in order to secure reduced tariffs of 7.5% on 120 billion dollars of Chinese exports to the US and 25% on the remaining 250 billion dollars. Meanwhile, China is already expanding its trading ties in Asia to reduce its dependence on the US market. This means getting the 15 interested Asia-Pacific economies, including the ASEAN countries, Australia, Japan and South Korea, to sign up to the Regional Comprehensive Economic Partnership (RCEP) during 2020. The RCEP promises revised rules on goods, services, investment, intellectual property trade, together with its own dispute resolution mechanism, while making no requirements covering labour rights, the environment, or the role of state-owned enterprises. One consequence of the push for the RCEP may be a reduction of high-profile activity in the South China Sea in the coming months, even though the first Chinese-built aircraft carrier entered service in December and will be stationed in the region. Hanging over much of China’s relationship with its neighbours is the situation in Hong Kong. The local elections in November became a referendum on the protests, with Beijing counting on those whose lives had been disrupted to back pro-government candidates. Instead, and to the surprise of both sides, democracy activists and opposition politicians won by a landslide on twice the usual turnout, taking 17 out of 18 of Hong Kong's district councils from government supporters. Although the councils have little power, this showing may give the opposition more say in the choice of the next Chief Executive in 2022, assuming Carrie Lam lasts that long in the post. Beijing sees the protests as stemming from demands that are more pragmatic than ideological, and thus largely solvable by measures such as building more affordable housing, although it is also considering imposing a new level of ‘patriotic education’ in Hong Kong’s school system. The economy just managed to make the 6% growth target for 2019 following a late rally, but the government cannot afford another year of 5.5-6% growth if the high-profile pledge of doubling both total and per capita GDP between 2010 and 2020 is to be achieved. The government and central bank will work together to provide more stimulus, with monetary policy loosened and new efforts to increase consumer demand after most households saved their 2018 tax cut rather than spending it. Efforts to increase skills in the workforce will continue, but a pressing need will be finding work for the large numbers returning to the countryside having lost jobs or been priced out of housing in urban areas.
TREND ▲ OUTLOOK ►
In the ‘phase one’ deal reached at the end of 2019, China appeared ready to open its financial services sector to US firms, although confusion about US tariff policy continues to complicate the situation for Western companies doing business in China. This is particularly true for tech companies following Washington’s campaign to prevent Huawei from selling its 5G equipment in the West. However, China has made a point of providing cheap financing and whirlwind regulatory approval to help Tesla build its first manufacturing plant for electric cars outside the US, moving from permits to production within 2019 and demonstrating what can be done with official approval.
Beijing reached the end of 2019 without the overt use of mainland forces against pro-democracy demonstrators in Hong Kong, but 2020 will remain difficult in the Special Administrative Region. Students in China are unhappy about a recent change that removes the phrase "freedom of thought" from many university charters and strengthening party control, with students at Fudan University, one of the most prestigious, holding protests on campus. Beijing is also worried about the rise in worker protests as the manufacturing sector sheds jobs that the retail and service sectors cannot replace. Such protests erupt not just because workers lose their jobs but also because they are often sacked with no compensation and owed several months' wages. Others find themselves still technically employed but with their monthly income drastically reduced as employers seek to cut costs.
TREND ► OUTLOOK ▲
Details continue to emerge about the mass detention and indoctrination programme that China has been using against Muslim Uighurs in the Xinjiang region. Beijing denies allegations of holding people against their will but appears prepared to shrug off international criticism of a policy that it sees as successfully promoting public security and national cohesion. The government crackdown in Xinjiang has driven thousands of Uighurs overseas, where a small number have joined militant groups.
TREND ▼ OUTLOOK ►
In November, the central bank cut the one-year lending rate for the first time since 2016, albeit by just 5 basis points, while trying to reward greater commercial lending to small and medium-sized businesses. More efforts to stimulate lending, including some rate cuts, look likely in the first half of 2020. The yuan benefited from prospects of a trade deal with the US towards the end of 2019, having dipped below the psychologically important level of seven to the dollar earlier in the year.
Foreign exchange reserves ended 2019 at just above three trillion dollars after a late dip, but the trend was upwards during the year. The IMF expects China's consolidated government deficit to widen to 6.1% of GDP in 2020, as it did in 2019, up from 4.8% in 2018. 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.
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