Previous Quarterly Editions
Expropriation Risk: 46 48 50 53 Political Violence Risk: 42 39 36 36 Terrorism Risk: 40 39 35 34 Exchange Transfer and Trade Sanction Risk: 43 43 45 48 Sovereign Default Risk: 48 45 42 40
TREND ▲ OUTLOOK ▲
China is experiencing twin downward pressures on economic growth from the effects of a campaign to deleverage the domestic economy and continuing trade tensions with Washington. During the first half of the year, the government was still focused on tightening credit amid fears that debt levels in the economy were unsustainably high. The clear change of course in mid-year towards looser monetary and fiscal policy in order to provide liquidity and stimulate business activity shows how seriously it takes the threat to the annual growth target of 6.8%. In addition to tax cuts, lending has increased substantially since July as the central bank steps up liquidity support to encourage banks to increase their lending to targeted areas such as small firms and infrastructure projects, particularly water conservancy, energy generation and transport. At the same time, regulators are cracking down hard on the peer-to-peer lending industry that has flourished online in the last 2-3 years as small companies found it hard to get loans through the usual channels.
A wave of defaults by peer-to-peer lending platforms in June-July this year has caused thousands of small investors across the country to lose savings. The tariff stand-off with the US looks likely to continue. The Trump administration is expected to impose Section 301 tariffs of 10-25% on an additional 200 billion dollars of imports from China as it continues to target Chinese trade practices related to technology transfer, intellectual property and innovation. China is expected to retaliate with tariffs of up to 25% on an additional 60 billion dollars of US imports, particularly agricultural products. This will be the third round of tit-for-tat tariffs, and neither side is moderating its position. China is unlikely to meet current US demands, which target the Chinese government's 'Made in China 2025' initiative and would require significant structural adjustments to its economic development plans. However, fears that the tariffs are dampening business sentiment and reducing investment are a major factor behind the new encouragement for lending and infrastructure investment.
China’s use of investment to win friends abroad may be becoming slightly more modest, however. The seventh Forum on China-Africa Cooperation (FOCAC) concluded in early September with a promise of 60 billion dollars in new development finance. However, this is no larger than the pledge made at the last FOCAC three years ago, and most of the money that is actually disbursed will likely fund Chinese-delivered infrastructure projects.
Regional concern about Chinese influence in the Pacific is growing as several nations, most recently Tonga, find themselves struggling to repay Chinese loans. Despite renewed US claims that Beijing is undermining a US-North Korean rapprochement because of the trade dispute, this is unlikely; China’s goal of preventing conflict on the Korean peninsula is too important to be put in jeopardy for the sake of trade-related disputes in which Beijing has many other cards to play.
TREND ▲ OUTLOOK ►
Washington’s decision in August to strengthen the powers of the Committee on Foreign Investment in the United States (CFIUS) was aimed squarely at China. A combination of Chinese regulators restricting capital outflows and concerns about US opposition to tech sector investment saw Chinese direct investment in the United States fall by 90% year-on-year in the first half of 2018.
Enhancing the CFIUS may provide a rationale for similar, if selective, Chinese action. However, Chinese regulators are working hard to open China further to FDI, which has slowed dramatically in recent years. A new regulation that took effect in July reduces the sectors that are off limits to foreign investors and expands those in which full foreign ownership is permitted. By 2022, these should include aircraft, shipping and passenger vehicles.
TREND ► OUTLOOK ►
More than 50 student activists were in Shenzhen in August after gathering from universities around the country to take part in a month-long protest that began as a dispute over the right of factory workers to unionise. Although the dispute is primarily a local problem, it has highlighted the Communist Party’s dilemma that to retain legitimacy requires showing that it alone can improve the lives of ordinary workers. This means cracking down on a new wave of left-wing activists who are trying to do the same thing outside of the Party structure, labelling them as dissidents, even as the country’s official unions remain toothless.
TREND ▼ OUTLOOK ►
Despite renewed UN criticism in August of its policies in the north-west region of Xinjiang, homeland of the Uighur ethnic group, Beijing has no intention of changing course.
Having spent large amounts of money to end the wave of terrorist incidents that began there in 2014, China has developed what may be the world's most technologically enhanced surveillance state. It is now seeking to recoup some of that cost by selling systems developed in Xinjiang as proven 'off-the-shelf' tools for other governments, emphasising the fact that there were no terrorist incidences in the region last year.
The renminbi experienced its sharpest sustained fall in history between April and July. Beijing says this was a response to US sanctions while the Trump administration claimed that it was an example of currency manipulation.
Although the currency subsequently recovered, it was clear that the central bank was ready to step in to prevent many kinds of cross-border flows, as it did during a similar slide in 2015-16, if the renminbi came close to reaching 7 to the dollar.
The banking system is increasingly well funded, government buffers are high, and the debt is largely held domestically. China will eventually have to sacrifice a portion of its growth if it wants to reduce its debt burden, but the government is not yet prepared to pay that price. Although the central bank has imposed some of toughest rules in the world on cryptocurrencies, China sees the underlying blockchain technology as an opportunity to gain global economic and technological leadership in an area at present unaffected by sanctions.
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