Speculation abounds on how China’s leaders will engineer the economy, markets and social sphere in 2014. Every pundit has their take on the direction on the world’s second-biggest economy, but the country has a record for proving both naysayers and optimists wrong.
Atlantic writer James Fallows got it right when he said late last year that analysts and forecasters must start “recognizing that incompatible-seeming observations may all be accurate.”
China Economic Review has compiled a list of the best predictions for 2014 while also assuring readers that the world will look at China with awe, antipathy, disgust and envy all at once this year.
Local debt: Roll over, play dead
Local governments in China in 2014 will need to repay about 40% of the US$2.9 trillion they owe in debt, a huge sum. Does that mean an escalation of the debt crises at the local government level?
Probably not. As in the past, Beijing will likely allow many regional officials to rollover the debt. This, as Financial Times pointed out, is already happening.
Many analysts have argued that if economic growth can outpace the growth of credit, local governments should be able to service their debt appropriately. Junheng Li, head of research at JL Warren Capital, said in a note to investors that the notion is flawed.
“The argument that China can grow out of the credit bubble is valid if and only if GDP growth increases the debt service capacity of the debtors,” she says. The central government, not local governments, is the main beneficiary of GDP growth through tax revenues. Higher growth will hardly help regional cadres, who bring in revenues primarily through land sales, Li says.
So while Beijing can certainly bail out troubled localities, China won’t be able to count on the economy to permanently grow its way out of a debt crisis in 2014.
GDP and stocks: Edging upward
It may not pay off regional debt, but GDP growth in 2014 is still front and center in determining how new leaders will run the country this decade. Higher growth means more investment, more debt and less change; lower growth will show a willingness to push through much-needed – and painful – reforms at the cost of growth.
The consensus points to 7.5% growth or above this year, which is a letdown for anyone waiting on reform. That also happens to be the GDP target senior leaders are expected to have set for 2014 at a meeting in December.
The Economic Observer, a leading Chinese business newspaper, polled 105 experts on 85 questions pertaining to China’s economy in 2014. Those experts said China will grow between 7.5-8% this year. Some said leaders will try to lift growth from the expected 7.5% in 2013 to around 7.8%.
This year will not be “China 7.0,” as Chinese media suggested six months ago. The ever-expanding figure is truly a snub to reform but it should help mainland stock markets after disappointment in 2013.
The Shanghai Composite Index fell 6.75% and the Shenzhen Component Index fell almost 11% last year. More than 50% of the experts surveyed by The Economic Observer said the Shanghai index would end 2014 above 2,200 points with factors such as the reopening of IPOs on the mainland contributing to the rise. Other Chinese media said that there was little hope of breaking 3,000. The index was at 2,044 on Monday morning, compared to a peak of 6,000 points in October 2007.
Housing prices and land reform: Nothing new
While mainland exchanges weren’t welcoming to investors in 2013, the real estate market certainly was. After rapid year-on-year growth in prices continued for a 19th straight month in December, according to the Chinese Index Academy, industry watchers have questioned whether or not 2014 will be the year that the China housing bubble pops.
A major burst is unlikely, according to a panel of 10 top experts surveyed by Southern Weekly, a Guangzhou-based paper known for its investigative reports. But the market could see some dips around the country, especially in areas where supply has far outpaced demand.
“Ordos will fall. Other hot areas will still grow, grow, grow” Shao Gensong, vice chairman of the Hangzhou City Management Committee, was quoted saying in the weekly. Ordos, a city in Inner Mongolia Autonomous Region, has been labeled by many Western media as a “ghost town” for its vast number of real estate projects but few residents. In 2013, rapid overdevelopment in Wenzhou, a center for commerce in eastern China, led to the first drop in prices in a major city.
The Economic Observer predicted 10% price growth this year.
At the heart of China’s property market lies the method in which rural land is converted by local governments into urban space where developers can build. In 2013, media buzzed with prospects for opening a market for some forms of rural land, particularly after a big government meet in November.
But the experts that shared their thoughts with Southern Weekly were not optimistic about this. While a few predicted slow progress, others held tight to the conservative line.
“It can’t. The land is the state’s,” Bai Yunping, a public servant in Beijing, told the paper.
Pollution, censorship and central control: Getting thicker
If the financial and economic outlook for 2014 is somber to negative, won’t things get better at least for the average Chinese citizen this year? Unfortunately, the outlook isn’t much better.
By many counts, the cloud of smoke that enveloped east and northeast China last year is here to stay, experts said. “There will be progress on cleaning up the environment though the problems are so huge that not much will change substantively in a year,” Bill Bishop, a China commentator, said last week in his newsletter “Sinocism.” Chinese-language publications by and large agreed, with some saying that it will take at least 10 years to significantly clear up the problem.
Anyone wanting to complain about smog-induced coughs may find it more difficult this year to voice such opinions online than they did in 2013. Beijing has cracked down on the use of social media such as Sina Weibo, China’s version of Twitter, and some fear that the increased level of control could extend to media such as WeChat, China’s most-used mobile messaging application.
“The stepped up control of the internet will continue [as] part of the broader, ongoing ideological tightening,” Bishop said in the newsletter.
Western media were thoroughly convinced that President Xi Jinping would continue to consolidate power throughout 2014. The power transition in March was followed by what those outside Beijing political circles take to be the centralizing of control in the hands of the new administration.
For Chinese people, that has several implications, the tightening on online speech being one of them. Another effect has been Xi’s massive crackdown on corruption, which has mainly taken down the new leader’s political rivals.
Yet Xi’s power grab mi
ght actually bode well for Chinese people in 2014. Without solid support, the party boss has little chance of pushing his reform-minded agenda through a sea of vested interests and conservative caution. So, there is hope that the more power that is consolidated by a small group of people, the closer China will get toward reform and opening. Call it a contradiction if you like.