2017 is an extremely important year for China. Fears about China’s economy are shaking global markets and capital is leaving the country at an unprecedented price. What are the market risks to be aware of? What is the outlook for the Chinese economy? What was the importance of the “One Belt, One Road strategy” to growth in China?
Metaphor of market risks - Two Pedals
In order to understand the government at this point in time and what they are trying to achieve in a simplistic way is to think of it as two pedals. One pedal is the stabilisation of growth, and once stabilisation is seen then the foot can go to the second pedal of tightening.
China is one of the only central banks and governments globally tightening balance sheets at this point in time. When you tighten, it can hurt investor sentiment as well as liquidity. It is vital to keep the balance between stabilisation of growth while ensuring that liquidity, credit costs do not blow out.
Another big question around the world at the moment is the relationship between the United States and China. Three months ago potentially the biggest risk was trade related risk with the US but this risk has significantly decreased since President Trump and President Jinping met in April this year.
A recent press release has come out from the Chinese to increase beef imports from the US into China, as well as trying to encourage financial services companies to access more Chinese Capital Markets both in terms of bonds and equities. The Chinese government is seeking to develop the bond market in particular and open it up to foreign investors to diversify China’s funding sources, and move risk away from the banking system. “China just agreed that the US will be allowed to sell beef and other major products into China once again. This is REAL news” Trump tweeted.
It is an expectation that future announcements will be made regarding these two economies.
What is the outlook for China in 2017??
From a political perspective, in October this year it will be the 19th National Congress of the Communist Party of China in Beijing. The party delegates will elect new leadership of the Communist Party of China. They will also have discussions around the new five year plan.
The key areas of the economy that President Jinping and government are going to be focusing on are the stabilisation of growth and the tightening of the balance sheets. At the start of 2017 the message coming out of Beijing is that the stabilisation of growth has been achieved.
Expectations are that markets will muddle their way through and not to expect any up or downside surprises. In Q1 of 2017 economic activity increased and has slightly declined in Q2. This has provided the government the ability to start tightening policies.
There is a big strategy around cleaning up China’s problems, very notably debt. This is to ensure that when they are opening their capital markets and their capital accounts that they have companies in an economic backdrop that looks attractive for foreign and domestic investors to invest in.
The importance of One Belt, One Road to growth in China
The One Belt, One Road (OBOR) strategy was initially announced in 2013 and appears to be very close to President Jinping’s heart. It is the recreation of the Silk Road, both maritime and rail to connect the two ends or Eurasia, as well as Africa and Oceania. OBOR is a strategy that will ideally result in all excess capacity, such as the build-up of steel over the years, being exported out to the world.
From a political perspective, it is also a way for the Chinese government to increase their soft power status, so they are not only funding projects within China but also their neighbours such as Pakistan, Malaysia, across Asia, Europe and even as far as Latin America. OBOR provides a global context for China to grow its economic links.
