Chindia Alert: You’ll be Living in their World Very Soon
aims to alert you to the threats and opportunities that China and India present. China and India require serious attention; case of ‘hidden dragon and crouching tiger’.
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China will not set an economic growth goal for this year as it deals with the fallout from the coronavirus pandemic.
It is the first time Beijing has not had a gross domestic product (GDP) target since 1990 when records began.
The announcement was made by Premier Li Keqiang at the start of the country’s annual parliament meeting.
The world’s second largest economy shrank by 6.8% in the first quarter from a year ago as lockdowns paralysed businesses.
“This is because our country will face some factors that are difficult to predict in its development due to the great uncertainty regarding the Covid-19 pandemic and the world economic and trade environment,” Premier Li said.
The country’s leadership has promised to boost economic support measures amid growing concerns that rising unemployment could threaten social stability.
The move comes as tensions between Beijing and Washington are becoming increasingly strained over the coronavirus pandemic, trade and Hong Kong.
On Thursday, President Donald Trump stepped up his attacks on China, suggesting that the country’s leader, Xi Jinping, is behind a “disinformation and propaganda attack on the United States and Europe.”
It came as Mr Trump and other Republicans have escalated their criticism of Beijing’s handling of the early stages of the outbreak.
Also on Thursday, China announced plans to impose new national security legislation on Hong Kong after last year’s pro-democracy protests.
The announcement was met with a warning from Mr Trump that the US would react “very strongly” against any attempt to gain more control over the former British colony.
Separately, two US senators have proposed legislation to punish Chinese entities involved in enforcing the planned new laws and penalise banks that do business with them.
Earlier this week, the US Senate unanimously passed a proposal to delist Chinese companies from American stock exchanges if they fail to comply with US financial reporting standards.
US-listed Chinese companies have come under increasing scrutiny in recent weeks after Luckin Coffee revealed that an internal investigation found hundreds of millions of dollars of its sales last year were “fabricated”.
Some 460,000 Chinese firms shut in the first quarter amid fallout from the coronavirus
Registration of new firms between January and March fell 29 per cent from a year earlier
Many Chinese businesses are struggling from the economic fallout of the coronavirus. Photo: Reuters
More than 460,000 Chinese firms closed permanently in the first quarter as the coronavirus pandemic pummeled the world’s second largest economy, with more than half of them having operated for under three years, corporate registration data shows.
The closures comprised of businesses whose operating licenses had been revoked, as well as those who had terminated operations themselves, and included 26,000 in the export sector, according to Tianyancha, a commercial database that compiles public records.
At the same time, the pace of new firms being established slowed significantly. From January to March, around 3.2 million businesses were set up, a 29 per cent drop from a year earlier.
Most of these new companies were in traditional centres of economic power, such as Guangdong province in southern China, and close to half of them were in distribution or retail.
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The number of business closures underlines the challenges facing China as it tries to revive its economy, which is at risk of a contraction in the first quarter for the first time since 1976.
“China has managed to get the Covid-19 outbreak largely under control and domestic supply disruptions have now mostly dissipated,” Yao Wei and Michelle Lam, economists from French bank Societe Generale, said in a recent note.
“However, there are signs of lasting damage to domestic demand, and on top of that the external shock resulting from widespread lockdowns in other major economies is arriving fast and furious.”
In Dongguan, a once thriving industrial hub in the Pearl River Delta, rows of empty shops and closed factories are becoming a noticeable feature of the landscape as companies grapple with slumping international demand.
Coronavirus: Chinese companies cut salaries and staff in industries hit hardest by Covid-19
In March, a local export-oriented manufacturer of tote bags and toys in the city, Dongguan Fantastic Toy Company, collapsed after overseas orders dried up, leaving some workers with unpaid salaries, the local labour authority said last month. The government has ordered the factory’s landlord to pay the outstanding wages.
Chinese business owners who can no longer afford to maintain operations face a number of hurdles before they can walk away from a company.
If an insolvent firm wants to cancel its company registration, it needs to go through bankruptcy procedures or show a liquidation report confirming it had no unpaid debt or other obligations.
Once shareholders or creditors file for bankruptcy, it can take months for courts to accept the case, followed by a long process of verification, creditors’ meetings and asset sales, said Li Haifeng, a partner at Baker McKenzie FenXun.
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“I expect a surge shortly after the situation settles down. We know many enterprises are already on the verge of bankruptcy. It’s just that they don’t have to declare or file for bankruptcy immediately,” Li said, adding he had received many queries on the matter in recent months.
Given the costly nature of bankruptcy proceedings, particularly for small businesses
struggling with cash flow or without sufficient assets, the number of bankruptcy filings this year would not be high, said Zhu Bao, a Beijing-based lawyer.
Fears over a growing number of companies going bust also appears to have played some part in Chinese courts rejecting and delaying bankruptcy filings, according to lawyers and official documents.
Creditors who filed on behalf of suppliers that helped contain the coronavirus or companies on the brink of bankruptcy as a direct result of the pandemic usually had their claims knocked back, dozens of court documents filed over the past two months showed.
We know many enterprises are already on the verge of bankruptcy. It’s just that they don’t have to declare or file for bankruptcy immediately – Li Haifeng
The courts in these cases encouraged the creditors to reconcile with the struggling firms and ride out the difficulties.
This – along with disruptions to court proceedings due to virus lockdowns – helped slow the review of bankruptcies in Chinese courts to 1,770 in February and March, from 2,160 filings in January, according to the national enterprise bankruptcy information disclosure platform.
“The delay and rejection of taking corporate bankruptcy cases is certainly intended to keep the economy going. Too many bankruptcies cases do not do much to help economic recovery,” Zhu said.
China’s central leadership has maintained it wants to hit economic targets for this year, even as the country braces for a possible second wave virus outbreak.
The delay and rejection of taking corporate bankruptcy cases is certainly intended to keep the economy going – Zhu Bao
The odds of a first quarter economic contraction for China are growing, however, and economists are debating whether it still makes sense for Beijing to set a specific gross domestic product (GDP) growth target for 2020.
Ma Jun, an academic member of the People’s Bank of China’s monetary policy committee, is one prominent voice that has suggested Beijing drop a set target amid the uncertainty caused by the virus outbreak.
However, others like Yu Yongding, an economist from Chinese Academy of Social Sciences, said it was necessary to anchor the country’s economic expansion, though the government should be realistic about the goal, reported the Beijing-based financial media group Caixin.
The manufacturing purchasing managers’ index, released by the National Bureau of Statistics on Saturday, was 49.5 in August
Figure adds to a month of woe for policymakers in Beijing, even ahead of planned US tariff increases on September 1, October 1, and December 15
China’s manufacturing purchasing managers’ index fell by 0.2 points in August as the trade war continued to bite. Photo: Xinhua
As the trade war with the United States continues to gather pace, manufacturers in China remain gloomy about their prospects, with the sector activity contracting for the fourth successive month in August.
The manufacturing purchasing managers’ index (PMI), released by the National Bureau of Statistics (NBS) on Saturday, stood at 49.5 in August, down from a reading of
, and below analysts’ expectations. The median result of a survey of analysts by Bloomberg expected a reading of 49.6.
The PMI is a gauge of sentiment among factory operators, with 50 being the demarcation line between expansion and contraction in sector activity. In the survey, manufacturers are asked to give a view on business issues such as export orders, purchasing, production and logistics.
That the index has remained in contractionary territory for six of eight months this year shows that the effects of US tariffs are resonating through the Chinese economy. The manufacturing PMI only showed expansion in March and April of this year.
New and higher US tariffs scheduled to enter force on September 1, October 1 and December 15 could provide some very temporary boost to Chinese exports and therefore manufacturers, should they inspire American buyers to make early purchases to pay lower tariff rates. However the long term trajectory is negative, with many manufacturers scoping out or already relocating to production sites outside the world’s second largest economy.
Also released on Saturday was the official non-manufacturing PMI, a survey of the construction and services sectors. This stood at 53.8, up from 53.7 in July, showing that these sectors have remained more robust in the face of a general slowdown in China’s economy. The Bloomberg survey of analysts had expected non-manufacturing PMI in August to remain unchanged.
Composite PMI, a combined reading of both manufacturing and non-manufacturing, was 53, down from 53.1 in July.
The August PMI decline “indicates downward pressure on the economy,” said Zhang Liqun, an analyst with the China Federation of Logistics and Purchasing, which produces the index with the NBS.
“Corporations’ forecasts of the market outlook were quite poor while being cautious on their production operations,” Zhang said. The PMI indicated a drop in new orders, which also reflected a lack of domestic demand. Given that the US is escalating tensions with China, downward pressure on external demand is also apparent, Zhang said.
August was a month to forget for policymakers in Beijing, with a series of negative data highlighting the serious economic challenges facing the nation. With the trade war threatening to tip the global economy into a recession, China remains heavily exposed.
The trade war is having a significant impact on Chinese manufacturing. Photo: Xinhua
While exports grew by 3.3 per cent in July, a sign of front-loading, imports fell by 5.6 per cent, emphasising the issues with consumption in China. This problem was also clear in retail sales figure, which came in at a disappointing 7.6 per cent for July, down from 9.8 per cent growth in June.
China’s housing market showing signs of bubble similar to that seen in Japan in 1980s, says Asian Development Bank Institute dean and CEO Naoyuki Yoshino
China’s loose policy following 2008 global financial crisis laid foundations for current housing bubble, with US-China trade war adding to concerns
The average price of a home in Beijing has soared from around 380 yuan (US$55) per square feet in the early 2000s to the current level of well above 5,610 yuan (US$813) per square foot, according to property data provider creprice.cn. Photo: Bloomberg
China must exercise extreme caution in handling its housing sector because it is showing signs similar to those witnessed during Japan’s bubble period of the 1980s that contributed to the collapse of Japanese asset prices and its subsequent “lost decades” of weak economic growth and deflation, a Japanese financial system expert warned.
The parallels between China’s current landscape and Japan’s three decades ago are readily apparent, stemming from a loose monetary policy that laid the foundation for the expansion of a housing bubble, said Naoyuki Yoshino, dean and CEO of the Asian Development Bank Institute.
China flooded its economy with credit in response to the 2008 global financial crisis, fuelling rapid growth in mortgages, real estate borrowings and investments over the past decade.
In the same vein, the Japanese government’s relaxed monetary policy in the 1980s triggered an economic bubble that eventually burst and sank the economy into a recession that
with the Bank of Japan continuing to still keep interest rates at or below zero per cent to this day in an attempt to spur inflation.
The Japanese government’s relaxed monetary policy in the 1980s triggered an economic bubble that eventually burst and sank the economy into a recession that lasted almost 25 years. Photo: Bloomberg
Japan’s experience could serve as a lesson on how to avoid a housing market collapse that would be especially detrimental to China’s financial sector and real economy, according to Yoshino.
“I’m very much concerned that if land prices keep on rising and if the population starts to shrink along with aggregate demand, then China will experience a similar situation to that of Japan,” Yoshino said.
There are already several strong signs of a housing bubble in China, according to Yoshino, firstly the astronomical surge in property prices in recent years.
I’m very much concerned that if land prices keep on rising and if the population starts to shrink along with aggregate demand, then China will experience a similar situation to that of Japan Naoyuki Yoshino
Home ownership is one of the few ways for Chinese families to generate wealth because of limited investment opportunities. The average price of a home in Beijing has soared from around 4,000 yuan (US$578) per square metre, or 380 yuan (US$55) per square feet, in the early 2000s to the current level of well above 60,000 yuan (US$8,677) per square metre, or 5,610 yuan (US$813) per square foot, according to property data provider creprice.cn.
The increase has also lifted the housing price to income ratio sharply from 5.6 in 1996 to 7.6 in 2013, well above the Japanese rate of 3.0 at its peak in 1988. The price to income ratio is the basic affordability measure for housing.
According to the Global Times, a reasonable home price should be three to six times the median household income. That means a family with an average income can buy a house with three to six years’ annual income. The house price to income ratio in China is above 50 in the first-tier cities and 30 to 40 in the third- and fourth-tier cities, the newspaper said in October. There are four levels of cities in China, defined by a number of factors including gross domestic product (GDP) and population, with Beijing, Shanghai and Shenzhen considered tier-one cities.
Another worrying sign, according to Yoshino, is that China’s financial sector has lent more heavily to the real estate sector than did Japanese banks during their bubble period.
Thirdly, the ratio of Chinese housing loans to the nation’s GDP has consistently been higher than Japan’s by about three times more.
Ever since US President Donald Trump started imposing tariffs on Chinese imports in July, worries have been mounting that China’s property bubble and its record debt level would make the economy vulnerable to the impact of rising trade tensions, leading to a sharper-than-expected economic slowdown.
Despite a government crackdown on debt and risky lending over the last several years, housing prices and bank lending to the sector have continued to rise, pushing homes beyond what the vast majority of people can afford, as well as putting many property developers deeply into debt.
The Chinese Academy of Social Sciences, a top government think tank, said in a report last week that the growth in housing prices in China’s bigger cities, caused by a relatively short supply of new homes, is likely to push up costs across the country.
“The government should closely monitor these cities to avoid overheating,” said Wang Yeqiang, a researcher at the Chinese Academy of Social Sciences who co-authored the report.
Property developers have begun a debt-fuelled land-buying spree just as urban housing demand is entering a long-running structural decline, said Julian Evans-Pritchard, senior China economist at Capital Economics. The potential supply of property that could be built on developers’ land reserves jumped last year to a record high, meaning the risk of a glut of new housing is real, Evans-Pritchard added, if developers were to convert all their land reserves into housing tracts.
“Since real estate drives around a fifth of GDP, a sharp downturn in this sector would be contagious, resulting in a jump in defaults across a wide swathe of the economy that could quickly erode bank capital buffers,” he warned.
China’s corporate debt stood at 155 per cent of GDP in the second quarter of 2018, much higher than other major economies, according to data from the Organisation for Economic Cooperation and Development. In comparison, Japan’s corporate debt level is 100 per cent of GDP and is 74 per cent in the US. China’s corporate debt includes issuances by its
vehicles which by extension is mostly credit with an implicit guarantee from the central government.
Since real estate drives around a fifth of GDP, a sharp downturn in this sector would be contagious, resulting in a jump in defaults across a wide swathe of the economy that could quickly erode bank capital buffersJulian Evans-Pritchard
China’s imbalance between housing supply and demand may worsen because it faces a similar economic transition that is already well underway in Japan – a
that led to Japan’s long-term deflation problem, said Yoshino, who is also the chief adviser to the Japan Financial Services Agency’s Financial Research Centre.
Even if rising housing demand due to urbanisation were to push China’s housing prices higher over the near term, the country faces risks from an oversupply of housing in the longer term due to its increasingly unbalanced demographic structure, he said.
The government has proposed that China’s retirement ages of 45 to 50 years for females and 55 to 60 years for males introduced in the 1980s be gradually increased to 65 years for both by 2045 due to a rapidly ageing population.
The rising population of retirees will consume fewer goods and services compared to younger families with children, and in turn, could dampen business investment given lower expected rates of return.
At the same time, more retirees means a bigger burden on the younger generation of taxpayers, which would reduce their wealth and change patterns of consumption. This is especially worrying on the back of China’s high debt level and pension funding gap, similar to the situation in Japan, Yoshino said.
In Japan, benefits from government pension schemes account for an increasing share of the country’s accumulated debt as spending on social protection programmes now represents more than a third of the government’s total budget.
China’s national pension fund is forecast to peak at 6.99 trillion yuan (US$1 trillion) in 2027 before it gradually runs out by 2035, according to the Chinese Academy of Social Sciences. Photo: AFP
forecast to peak at 6.99 trillion yuan (US$1 trillion) in 2027 before it gradually runs out by 2035, according to the Chinese Academy of Social Sciences, forcing the government to start to transfer assets from state-owned companies to fill the funding gap.
Against the broader economic slowdown, compounded by the trade war with the US, policymakers are also expected to carve out a highly expansionary fiscal budget for this year, with the broad deficit surging to 6.6 per cent of China’s GDP, up from 4.7 per cent last year, according to Larry Hu, head of China economics at Macquarie Capital.
Alicia Garcia Herrero, Asia-Pacific chief economist at Natixis, noted that the US criticisms of China’s unfair trade practises and currency manipulation were reminiscent of the US-Japan disputes in the 1980s and 1990s.
Because Japan was politically and economically dependent on the US at that time, it inevitably implemented economic policies to reduce its current account surplus. Subsequently, Japan suffered from the bursting of its asset price bubble, which led to deflation and the lost decades.
However, Herrero said that the modern China is less dependent on the US and so is in a better position to resist pressure to adjust its economic policies to create demand for American products.
Wang Yang, one of the seven members of China’s elite Politburo Standing Committee, said the US-China trade war could slash one percentage point off Beijing’s economic growth this year. Last year, growth expanded at its slowest pace since 1990, while corporate bond defaults hit a record high and banks’ non-performing loan ratio hit a 10-year high.
WASHINGTON, April 9 (Xinhua) — The International Monetary Fund (IMF) on Tuesday revised up the 2019 growth projection for China to 6.3 percent, up 0.1 percentage point from its previous estimation in January, according to the newly released April 2019 World Economic Outlook (WEO).
The upward revision reflected the combined impact of recent developments in the China-U.S. trade talks, China’s stronger-than-expected expansionary fiscal policy, and a slowing global economy, Changyong Rhee, director of the IMF’s Asia and Pacific Department, told Xinhua.
“We have to revise our growth forecast due to more fiscal expansion, at the same time, the global economy has started to slow down, that actually has negative impact on that,” Rhee said, adding that the IMF made the latest projection taking into account both positive and negative factors.
In its latest annual government work report, China set the 2019 gross domestic product (GDP) growth target at 6-6.5 percent. The world’s second-largest economy also pledges to continue pursuing high-quality development.
The IMF’s medium-term forecast sees a gradual slowdown in China “as internal rebalancing toward a private-consumption and services-based economy continues and regulatory tightening slows the accumulation of debt and associated vulnerabilities.”
In the latest WEO report, it projected a 6.1 percent growth rate for China in 2020, slightly down from the previous estimation of 6.2 percent.
The report highlighted trade tensions as one of the key sources of downside risk to the global outlook, noting that raising tariffs would lead to higher prices for consumers, and trade policy uncertainty would reduce business investment, disrupt supply chains, and dampen productivity growth.
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CHINDIA ALERT: You'll be living in their world, very soon 