Brighter days but how much clearer?

The early months of the year have witnessed a general improvement in the Chinese economy, or at least a positive shift in the perceptions. Growth appears to have recovered somewhat, the renminbi has stabilised due to a mammoth effort in controlling the outward movement of capital, and the property market remains as disconnected as ever, in ways that benefit the maintenance of the status quo for at least a while longer. The backdrop to all this is that this is a special year because later this year the 19th Congress of the Chinese Communist Party will take place, a landmark moment on which much depends for all concerned. All that has occurred so far in 2017 is merely an entrée to the year’s Chinese political banquet.
Last year was not judged to be a good year for the Chinese economy by many analysts. It began with wild fluctuations in the stock market followed by problems with the RMB exchange rate, growing piles of local government and corporate debt, continuing capital flight and a general sense that the “real” economy of China was not in great shape, with private and foreign investment down, supplemented, it appeared, by infrastructure splurging and debt nurturing.
This year began with further measures and tightenings of controls to stop or at least slow the outflow of cash, to such an extent that some many players were spooked. The authorities in February had to re-assure foreign companies that they would continue to be allowed to move their profits from mainland business offshore. But the foreign exchange reserves have stabilized at just over what has become the magic mark of US$3 trillion, which suggests that the party-state has been burning less cash in an effort to support the currency.
The leadership, focusing fully on the 19th Congress, wants a smooth year economically. No surprises and no big shifts, which given the uncertainties emanating from Washington, is not an easy task. But then they have total control over all the domestic buttons and the levers, if not every tectonic plate. The Shanghai stock market has been lurching around just above 3,000 and has been solid enough to allow for a stream of IPOs, but not enough to create a shift in basic perceptions of its real-ness. Business activity has been fairly buoyant, although many analysts still point to the debt problem as something that will not go away and has the potential – at least in any other system – to blow up.
China’s debt has nearly tripled in the past eight years, and is at or above the levels that in the United States caused the horrific Global Financial Crisis in 2008-2009. In one recent research report, Mizuho Securities said that total debt in China’s non-financial companies alone now amounts to 145% of the size of the country’s economy.
Local government debt remains a significant and growing problem, too, with the only sensible long-term solution being a property tax, a regular stream of income to replace the one-offs of land sale and transaction fees. But the authorities seem to feel it is just too sensitive and too hard to implement. Trial efforts to institute such an annual tax levy from property owners on a test basis in Shanghai and Chongqing in recent years have failed due a very strong backlash from what might be called “the middle class.”
This is part of the real longterm dilemma that the party-state faces – how to maintain the status quo without making some fundamental concessions to this group with regard to transparency, accountability and participation. In a way, it goes back to the Boston tea party, the defining moment in the American Revolution in the 18th century, with the slogan “no taxation without representation.”
Property prices in China’s major cities last year where up more than 25%, thanks fundamentally to a mixture of speculative fever and a lack of alternative investment channels. That takes the pressure off the authorities for a while, but also exacerbates other problems – the property bubble may be made of cast iron, but it’s still a bubble, and the price rises mean that the younger generation of workers who missed out now have effectively no chance of every owning an apartment in anything other than the boondocks.
The improvement in the economic climate in early 2017 feels more cyclical than solid, and is fed by determined measure by Beijing to keep things on a stable track short-term regardless of the longer-term consequences. The bottom line is that what is happening in China’s economy today does not feel like a significant structural shift with serious problems being faced and resolved regardless of pain. The general sense is still of cans being kicked down the road, and days of reckoning being delayed.