CHINA, the star to which President Rodrigo Duterte seems to want to hitch the Philippines’ wagon, now appears closer to a significant economic downturn – a “hard landing,” if you like – than it has any time in the past five years.
Of course, the usual caveat needs to be offered: This is China we’re talking about, and China has a way of rewriting economic assumptions; predictions of doom in the past few years have largely been confounded.
Nevertheless, there is a sense that the slide is unstoppable this time, and that perhaps, Xi Jinping and his government intend to let it happen.
The most recent indicator that something is wrong in the Chinese economy was its trade balance in September. The country’s trade surplus was $41.99 billion, the lowest it has been in six months, but more significantly, well below analysts’ and the government’s own forecasts, which were all in the range of $51 billion to $53 billion.
China’s drop was also part of a general decline in demand for Asian goods, contrary to the normal yearly pattern in which trade in September-October gets a bit of a boost ahead of the year-end holiday season; South Korea has also reported weak trade figures, as has Japan.
Some shifts in trade patterns have been expected, since China is making a concerted effort to tip the balance of its economy towards more domestic consumption, but what worried analysts about the September trade figures was that imports declined as well. The drop was moderate, just 1.9 percent, but forecasters had anticipated a slight increase.
There does not seem to be an end to the downward direction of the economy in general, because the People’s Bank of China has given no indication whatsoever that it intends to change its policy of gradually letting the yuan depreciate on a trade-weighted basis. After all, whatever is China’s policy aspiration for a more domestically driven economy it is still fundamentally driven by exports, which are better served by a declining currency. Of course, the other side of that coin is that imports become more expensive, and that will continue to drag domestic growth. The yuan was trading at six-year low against the US dollar earlier this week, largely because of the disappointing trade data.
In his weekly note this week, The Economist Intelligence Unit’s (EIU) chief economist Simon Baptist made another interesting observation. Over the past five years—in which, Baptist pointed out, EIU has concluded China probably would avoid a “hard landing”—there has been a rapid buildup of credit, coupled with economic reform efforts that have fallen short of expectations.
Not only is the credit load unsustainably large, Baptist said, much of it has gone into state-owned enterprises rather than the comparatively more productive private sector, which means that for much of the credit burden the assumption that the loans will be serviced by future profits is probably wrong. EIU’s view now is quite the opposite of what it has been. The think tank now sees a “hard landing,” which they define as a decline in the growth rate of at least two percentage points over a one-year period, is unavoidable.
And because the Chinese government doesn’t really seem to be doing much to stop it, Baptist suggested allowing a hard landing might actually be a part of Xi Jinping’s longer-term plans. For now, stopgap measures such as the central bank’s manipulation of the yuan will be used to keep a sharp slowdown in check, Baptist said, to avoid “bad economic headlines” ahead of the next Communist Party congress in October next year.
After that, mostly likely in early 2018, Xi is likely to allow the inevitable to happen—let some of the most problematic debt simply go sour, which will cause some short-term disruption but remove the problem in the longer term, consolidate, downsize, or privatize some state-owned enterprises, and impose stricter monetary and credit controls that haven’t been possible while business has been going relatively well.
What that might mean for the Philippines in detail remains to be seen, but it could be generally expected that Chinese investment, particularly anything with government backing, will become much tighter. For an administration anxious to curry favor with and increase business ties to China, that might mean either disappointment, or being obliged to make a great many concessions, neither of which would be an appealing development.