China Economic Update: Further State Control

An apt quote describing Chinese economic reform (my emphasis added):

The analytical community will pore over the entrails [of the reform agenda] to analyse whether the spirit of market-based reforms continues to flourish for the future. Or whether it has begun to fade amidst a more general Chinese political and ideological redirection to the left. Or just as problematically, for economic reform to die at the implementation level because of confusing political and policy signals from the centre, meaning that it is much safer to just keep your head down. Or because there are limited local incentives, either personal or institutional, to actively prosecute reform which inevitably generates local conflict with deeply entrenched vested interests. Or, more likely, an unholy cocktail of the above, collectively reinforcing a natural predisposition towards bureaucratic inertia.

-Kevin Rudd

President of the Asia Society Policy Institute and Former Australian Prime Minister

As this blog has stated many times before, Chinese economic reform is dead. China, for the past decade, has seen a systemic rise in debt as state influenced asset allocation becomes increasingly inefficient. Three years ago Chinese credit growth was 16.6% . With over $40 trillion in bank assets, it will not likely return to previous growth levels. Even so, the current  pace of credit growth, 10%, once again exceeds nominal GDP growth, meaning that China is adding to economy-wide leverage rather than moderating the debt load.

Xi in Davos

In 2017, General Secretary of the Chinese Communist Party Xi went to Davos to promise to defend globalization and reform the Chinese economy.

The SOE share of listed company revenue in “normal” industries–those that Beijing identified as non-strategic and commercial–increased significantly, to 15.6% in 1Q2019 from 14.8% in 4Q2018. This increase is the first since 1Q2016, and it shows that the state is advancing even in industries where Beijing set out to withdraw influence in the 2013 Third Plenum Decisions. Industrial SOE assets grew by 4% year-on-year in 1Q2019, faster than private asset growth of 1.4%. SOE profitability flattened in 1Q2019, suggesting that past policies framed as reform (e.g., capacity cuts, deleveraging) have failed to improve SOE efficiency. Returns on SOE assets peaked at 4.5% in 3Q2018 and then declined to 4.0% in 1Q2019.

In 1Q2019, the State Administration for Market Regulation (SAMR) reviewed 28% of foreign-involved mergers but only 9% of domestic mergers. At the same time, China’s poor judicial transparency has deteriorated further. Courts publish less than 5% of the competition and intellectual property disputes they handle each year, with significant delay. In 1Q2019, the courts even removed previously published cases (400–600 cases a year) from their websites.

Communism Guides the Economy

I recently read through the 国务院关于深化国有企业改革的指导意见 (Guiding Opinions of the Central Committee of the Chinese Communist Party and the State Council on Deepening the Reform of State-owned Enterprises) which was published in 2015. Here are two interesting quotes with translations following:

1.) 坚持党对国有企业的领导。这是深化国有企业改革必须坚守的政治方向、政治原则.  The Party’s leadership over SOEs shall be upheld. This is the political direction and principle that must be held fast to in deepening SOE reform.

2.) 企业党的建设全面加强…工作体系更加完善,国有企业党组织在公司治理中的法定地位更加巩固,政治核心作用充分发挥.  The Party building of enterprises shall be comprehensively strengthened… In addition, the Party organizations of SOEs shall enjoy a more solid statutory position in corporate governance, and fully display their core political role.

Chinese reform has regressed towards China’s bureaucratic mean- communism and state control. As China releases GDP numbers, quarterly updates, and policy guidelines, readers should put those documents into a clear framework: China is slowing, debt is growing, and the state is consolidating.

Lastly, here is a quote from the EU Chamber of Commerce’s report “18 Months After Davos:”

One of the largest concerns for European players in the healthcare equipment sector is the CM2025 initiative. The China Manufacturing 2025 Key Area Technology Roadmap, which was drafted under the guidance of the China Academy of Engineering, sets domestic market share targets for Chinese players in the healthcare equipment sector. International players are concerned that any available support will only be extended to domestic companies. So far, there has been no obvious effect on the healthcare market, and the European Chamber has been assured by the Chinese authorities that this implementation strategy is not to be taken seriously.

Thanks for reading.

 

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