It seems that China is preparing for a difficult 18 months. President Xi and Premier Li have to implement key decisions now, that will create winners and losers.
This is therefore the moment when they have to take the pain that results from the need to reverse the ‘lost decade’ under Hu and Wen. Otherwise, they will waste the momentum that has been built up over the past 2 years behind the development of China’s New Normal policies.
This process is not going to be easy, as Ed Zhang, editor-at-large of China Daily has recently described:
“When Premier Li Keqiang was talking about “mass innovation” – or a society flourishing with thousands, if not millions, of small companies driven by digitally powered leading technologies – he represented a country that is not today’s China, but the vision of his colleagues at the top level.
“In sharp contrast, officials from some provinces that are behind the rest of the country in economic growth (and in public services) continued to raise their hackneyed appeal – heard by China observers in the 1980s, 1990s, and 2000s – for:
- Bailout money from the central government for their mining companies (which are apparently running out of resources)
- For their workers stuck in low-paid jobs
- And for their cities that are saddled with dilapidated public services
“They are, as it were, the shadow of a China that is fading from public memory.
“In fact, from many of the places featuring poor government reform and weak market vitality, like the old industrial cities of the 1950s in the rust belt of Northeast China, there has been a continuous drain of population. Young people don’t want to wait for the government handout and they have been attracted by the opportunities and services in coastal cities”….
These cities are the losers in the move to the New Normal. They will not get the state support that they are expecting, and there will be major bankruptcies as a result.
The criteria for this support has been decided, and Zhang goes on to highlight its key elements:
2 DOZEN CITIES ARE KEY TO CHINA’S FUTURE GROWTH
“In reality, there are about two dozen or so cities that host most of the country’s realistic activities and, perhaps, opportunities. They are also where the country’s most highly educated people gather and build their companies. To a great extent, how China’s transition evolves and succeeds depends on these cities continuing to flourish. Chinese officials tend to present them in four or five so-called city clusters. But the city clusters just belong to a government plan. Not much action has been taken so far to make them real.
“The key is, however, to look at what people are doing in those few cities to decide how the country’s transition progresses. They will be the cities that:
- Have a longer history of reform and opening to the global market, and with a high mixture of local and international enterprises
- Have a smart and business-friendly local government that is not plagued by corruption scandals, mass protests and wasteful public projects
- It must particularly have a lower ratio of local government debt to GDP
- Have a large migrant labor force, joined by workers from impoverished rural areas and engineers and managers trained from abroad
- Have a large base of competition and collaboration and many privately owned small companies
- Have a good base of education, represented by a multitude of technical schools suitable to the current stage of development and able to meet the demand from newly emerging industries and services
- Have a relatively good state of public infrastructure but not so much of an imbalance in the housing market, which must have relatively low residential housing prices, a good supply of not-so expensive office space. The city must also have a relatively good environment (hopefully with less smog than Beijing).
“Most of these types of cities are near China’s coast. Others are large regional business hubs in the nation’s interior. If these cities can grow stronger in both their economy and government services in one to two years, they can be leaders of real progress.
“But if they fail, that would be a totally different story.”
There really are no guarantees in this process. The move to the New Normal policies is as major a change as Deng’s opening up of China after Mao, and Jiang/Zhu’s decision to join the World Trade Organisation.
In fact, the newly announced China section of Bank of England ‘stress test’ for UK banks is essentially my Scenario from a year ago, and may well turn out to be optimistic, namely:
“The remnimbi is allowed to depreciate 10% against the US dollar by 2015 Q4…. Chinese residential property prices trough in 2016 at 35% below their level at end-2014. Falls in commercial property prices are more pronounced, reflecting the larger average overhang of unsold property in that market. This is associated with sharp falls in real estate investment and industries associated with construction.
Real GDP growth remains positive in China, but falls to a rate of 1.7% in Q4 in the scenario.“ (my emphasis)