Summary:
– The Chinese economy is slowing down: after growing by 7.3% in 2014, activity is expected to grow by « only » 7% in 2015.
– This gradual slowdown in economic activity in China, which is undergoing a transition to a growth model more focused on domestic consumption, should not give rise to exaggerated fears.
– Other issues require particular attention. On the economic front, for example, the fight against inequality, which is generating tensions, and the importance of shadow banking in public and private financing.
The annual conference on country risk organized by Coface took place on Tuesday, January 27, 2015, at the Carrousel du Louvre. Among the main topics discussed, the slowdown in the Chinese economy was the subject of a round table discussion. Stéphanie Balme (researcher and professor at Sciences Po), Emmanuel Bonhomme (Vice President of Strategy and ASP Business, Johnson & Johnson Medical EMEA (Europe, Middle East, Africa) – Global Surgery), Graham Hutchings (Managing Director of Oxford Analytica), and Rocky Tung (Asia-Pacific Economist at Coface) discussed the issue.
Although China became the world’s leading economic power in terms of purchasing power parity in 2014, Coface has placed China’s « A3, satisfactory » country risk rating under negative watch. This is because China’s economic growth is slowing and could reach « only » 7% in 2015, after 7.4% in 2014.
Several reasons have been put forward to explain the expectations of this slowdown. First, the real estate sector, whose slowdown is expected to affect many supplier sectors (steel, cement, etc.), after years of very strong growth that gave it an excessive share of added value. Overcapacity in the manufacturing industry and declining investment profitability are expected to weigh on the contribution of gross fixed capital formation to growth in 2015. In addition, the increase in corporate defaults and non-performing loans is likely to weaken the solidity of banks and credit distribution conditions. The level of private and local government debt in China, which is difficult to estimate precisely due to the development of shadow banking, which could account for a third of total financing, is also a cause for concern.
Although it has slowed, the expected 7% increase in China’s gross domestic product will still represent $800 billion (at the current exchange rate). In the wake of this gradual slowdown in activity, price increases have been weakening significantly for several months (around 1.5% year-on-year for the past few months). For the time being, the landing of the Chinese economy, which is going through a period of transition due to the change in its growth model, should therefore not give rise to excessive fears.
For Chinese leaders, this change in model represents many other challenges beyond the purely quantitative aspect of growth. Domestically, rising inequality, emerging protests among part of the (young) population revealed by the events in Hong Kong, reforms of the health, education and justice systems, and the management of the environmental crisis are real sources of concern for the Chinese government and represent areas of work towards a new, more efficient economic and social model.
The fight against income inequality is essential in order to promote the emergence of an economy that is more consumption-oriented and less investment-oriented, whose marginal profitability is slowing down significantly and is being felt, according to Emmanuel Bonhomme. The development of a « shadow » financing system, known as shadow banking, allows companies to bypass the traditional banking system to finance their projects, but also subjects them to usurious interest rates, which weakens them financially. China’s energy transition, which aims to move towards a mode of production that emits less CO2, has brought Chinese leaders closer to their Russian counterparts, leading to the signing of major contracts for the delivery of hydrocarbons in the coming years.
A survey of the audience at the Coface conference on the impact of the Chinese slowdown revealed that nearly one in two people present (49%) felt the impact of the Chinese slowdown on their business.
Externally, the management of its international relations, particularly with its neighbors. According to Stéphanie Balme, China does not seem motivated by the goal of becoming the world’s leading power, but rather by consolidating its position in Asia.
China must also make progress in terms of transparency and the fight against conflicts of interest, an area in which President Xi Jinping has promised advances as part of his anti-corruption campaign. This lack of transparency is also palpable economically in the production of Chinese statistics. Chinese statistics are published very early and are not revised. This sometimes appears problematic when viewed from the outside. However, as can be seen in the links between companies, it is important to understand that social and economic relations in China are guided more by long-term trends and well-established trust.
