March Insight - The Politics of GDP projection in China

March is the annual meeting of the National People’s Congress and the Chinese People’s Political Consultative Conference.  The key agenda item is the ratification of the new leadership. In terms of imagery this is a process that is comparable to the American inauguration in terms of surprise on who will be speaking. The leadership positions of President Xi and Premier Li will be ratified.

What will be important to the international firms, resource and commodity firms globally and to trading nations with strong links to China is the impact of politics on economic growth for the balance of the year.  It is too early to predict the specific policies that will be ratified in March but Intercedent is predicting a greater political influence on economic policy and growth in Gross Domestic Product this year.

The number of 8% to 10% growth will no longer be sacrosanct and it is likely that GDP may slow.  Intercedent predicts 5 to 6% growth. Intercedent also predicts that this by and large will not impact on imported commodity demand with the exception of coal. The contraction will be in hospitality, high end construction and engineering EPCM services, luxury goods and the profits from government fostered arbitrage that drive pricing set by corruption and not the market.

This statistical down turn is because of a number of political and also internal and external economic factors. China’s spending, especially by State Owned Enterprises and national and local infrastructure is driven by the government.  The personnel changes that will take place over the balance of the year at the Ministerial level, SOE level, within government driven policy banks and at the provincial and municipal level with respect to Party Secretaries, Governors and Mayors will be slow but sure.  During these periods outgoing officials will be reluctant to spend and incoming ones will want to understand their portfolio before committing to major new investments.

The new government is committed to the eradication of corruption. This will have an overall positive effect on society and government expenditure. Short term it may slow down the economy as the complaints of the hospitality, luxury and alcohol industry have flagged. Long term reduction of corruption will reduce government spending, misdirection of project funds, increase economic efficiency and ideally return the importance and time schedules for decisions contained in Administrative law to guide government approvals.

North American, Japanese and European Demand for exports will continue to remain flat. China’s inflationary wage pressures, monetary policy outside of China and reduction of consumer debt will still curb export growth from China.

The new leadership is less likely to rely on stimulus packages and focus on structural dysfunction in the economy. This will likely include increased concern and monitoring of bank lending, municipal debt, railway sector debt and the overspending to build larger modern buildings on campuses by most if not all of China’s universities and colleges.

There will also be an increase in the transfer of capital by the private sector off-shore. This is due to lower returns in China, gentrification of the first wave of entrepreneurs who are contemplating estate planning and personnel retirement and risk management strategies for their private equity.  This will assist China to reduce its foreign exchange reserves as off-shore investment policies for the private sector are being liberalised. Short term until these investments off-shore start driving exports of goods and services, Intercedent predicts that this slowdown in private sector investment will place a small drag on GDP growth.

The political focus in China’s economy under the new leadership away from GDP to a more balanced social harmony can be best understood in economic terminology by reviewing the Genuine Progress Indicator and the Human Development Index. This welcome emphasis on environmental protection, improved social benefits, health benefits and what was called harmonious society by the outgoing administration are all positive but will redirect spending in a way that will improve the quality of life. It may also positively reduce the statistical obsession with GDP growth. This will create the conditions for a more accurate preparation of GDP growth numbers in a less political environment. Reported numbers that have been treated locally by many officials as more of a reporting quota ideally may now become a more representative and accurate tracking number of real economic growth. This is especially true when the next Premier of China is already on record with his doubts about the accuracy of China’s economic statistics.

 

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