China in 2018: Well-prepared for new changes and challenges

By Navjot Singh 

China’s economic growth target for 2018 will reflect new changes in the economy as the government has put more importance on higher quality development in all areas, the State Council Information Office said in December. The information office went on to say that China will strive for higher quality, more efficient and a fair growth, reiterating a pledge made by President Xi Jinping at a party congress in October. Sprung on by sustained state spending, a construction boom and resurgent exports, analysts forecast China’s economy should beat the official growth target for this 2017. I would say that in our living times, President Xi Jinping is in a stronger position than ever; suggesting that effective management of imbalances and more consumption- and innovation-driven growth can be expected.  

Chinese people walk by a construction site at the Central Business District in Beijing, Tuesday, Sept. 19, 2017.[Photo: AP/Andy Wong]

The economy is sustaining growth and grew 6.7 percent in 2016, a 26-year low, but has expanded 6.9 percent in the first three quarters of 2017. Despite the World Bank raising its forecast for China’s economic growth in 2017 to 6.8 per cent from 6.7 per cent it projected in October, as personal consumption and foreign trade supported growth, it has thankfully kept its forecast for China’s 2018 and 2019 GDP growth unchanged at 6.4 per cent and 6.3 per cent, respectively, due to less accommodative monetary policy. 

In the past two-and-a-half weeks, China’s equity market has fallen five per cent while yields on 10-year Chinese government bonds briefly jumped above the crucial 4 per cent threshold, in a sign of growing investor anxiety. I think 2018 will see China shift its priority to financial deleveraging and environmental protection from reducing industrial competence and managing the housing market, as the last two sectors have been somewhat restored to health. 

Of course, there are also some experts who are saying that China’s growth miracle has run out of steam and there is uncertainty around things like house prices. This recent volatility has brought to the front questions over the investment outlook for 2018 and beyond and whether economic headwinds could damp prospects for China. It’s a serious topic and one that can ruffle some feathers in major financial centres globally no doubt. But are we going to see anything as ugly as what we saw in 2008 and should we be worried? I don’t believe so, and even during the economic depression of 2008, China was thriving ahead of the rest of the world.  

While there is a lot of hype around this, I actually believe that people should stop worrying about Chinese debt as I don’t believe that a crisis is brewing. I personally think that this is normal for a country of China's size. I recall a talk I attended with the well-known economist George Magnus commenting that while China’s heydays of growth at a dizzying pace have gone, it is perfectly normal for a country of this size to go through this period of a slower and bumpy ride and it will continue to grow at around this rate for a few years.  

But make no mistake because in fact it is still remarkably a faster growth rate than most of the world’s countries. Amid experts speculating of mounting debt and the end of cheap funds, it is actually not that bad. From my opinion it is normal for analysts to be concerned and cautious because then people can be prepared to prevent any major crisis.  

My optimism is backed up by Chetan Ahya, Morgan Stanley’s Co-Head of Global Economics and Chief Asia Economist and Jonathan Garner, Morgan Stanley’s Chief Asia Equity Strategist who note that China has proven to succeed and take courage from difficult times in the past. In the aftermath of both global financial crises-in 1998 and 2008-even as many markets fell one after the other like a pack of dominos, China held fast as an anchor of economic stability. Ahya and Garner believe that it can avoid the worst yet again in 2018 and beyond, noting three key factors: 

China’s own savings have funded its build-up in debt, which has gone into investment, not into consumption

The government enjoys strong net asset positions both domestically and externally

Strong external comprehensive positions, including high levels of foreign currency reserves, and lack of significant inflationary pressures, leave China to deal with domestic liquidity situations

So who are going to be winners in 2018?  

People 

Yes, Chinese consumers are going to be main winners. The future Chinese consumer will be richer, older and more tech-savvy. According to World Bank data, China’s per capita gross national income (GNI) of $290 in 1985 had nearly doubled to $540 by 1995, more than tripled to $1,760 by 2005, then quadrupled to $8,100 by 2016. A 2017 Bluepaper report by Morgan Stanley says that this unprecedented lift from low to middle-high income status is now set for the next stage of an even harder climb and forecasts that “China will break out of the middle-income trap and join the rarefied ranks of high-income society” attaining per capita GNI of above $12,500 by 2027. We are seeing growth in annual salaries even now as we speak. 

Technology, and Research and Development 

When it comes to technology, especially digital technology, China in my opinion is set to dominate for years and decades to come as the country continues to fund research, reaping major benefits and you only have to pay a visit to a city like Shenzhen and Suzhou to see the vast investment in technology. China is the home to the major platforms for economic and social interaction, which benefit from the closure of informational gaps, and, most importantly, Artificial Intelligence capabilities. 

Indeed, it's incredible to see China investing to create jobs in Artificial Intelligence and Green Energy, while the US still tries to support Coal jobs and sadly the picture is grim in Europe- you only have to look at places such as the UK where the adoption of digital is at a much slower pace than in Asia-Pacific. I was really impressed the way China is excelling in Green Energy. From London to New Delhi to Melbourne, cities around the world are pledging to stop burning fossil fuels for electricity by 2050 or sooner. But the Chinese province of Qinghai already reached that goal in 2017. For seven days- from June 17-23- the region ran on 100% renewable energy, including solar, wind, and hydropower. It just goes to show and demonstrate the country's drive.  China is to invest £292bn in renewable power by 2020.   

Whatever Western markets think about China, it's astounding what ambition can accomplish. Having lived and worked here for the past 12 years, I can say that the progress is tremendous and someone like me gets a kick out of it- you feel the energy and you feel the power every day and everywhere. That is what is attractive about China now and that is what will be attractive about China in 2018. Even second tier cities such as Shenzhen and Guangzhou have changed more in two years than any American city has changed in the past fifty years.  

We've had the era of China inspiring to replicate the west, then China inventing their own systems and models and the West effectively ignoring them because of ignorance or lack of local knowledge. But now the tables have turned. Building for a mobile first world is fascinating and the most interesting thing that is likely going to happen from my opinion in China in 2018 is that probably likely that the West is now going to start to copy China. We’ve already seen this where companies like Facebook, Apple and Twitter are looking at apps such as WeChat for example and thinking “Oh, they’re doing something better than what we thought they would do but let’s see if this really would work in the West!” In mobile online payments systems, China is again in the lead and will continue to dominate in 2018. With much of the country’s population having shifted directly from cash to mobile online payments—skipping checks and credit cards—China’s payments systems are robust and I am confident that systems such as Alipay and WeChat will help to facilitate that. I always try to persuade my European friends and colleagues to start using WeChat, but there is this sense of ignorance and shrugging of shoulders which is so wrong because they will be left behind while countries like China and India forge ahead in digital transformation.  

Away from technology and people, I would say that China is going to excel tremendously in the way information is collected to grow the economy and the way companies grow. I’ll give a key example: in China and in Asia on the whole, demand for independent financial research is surging and the industry is growing strongly and it’s a part of the world where emerging market investors are getting world-class knowledge of company supply chains, key personnel moves or regulatory shifts. The growth of independent financial research firms in China, such as Third Bridge, a leading independent financial research firm, equips the country’s struggling hedge and mutual fund industry with a key information service. Building a database of company executives, policy experts and academics, whose services are offered to investors interested in tapping this expertise. In fact, I would not be surprised if there is also impressive scope for expanding independent financial research services—from credit assessments, forum calls, and research reports, to asset management— on the Alipay or WeChat platform. And it’s not only valuable for companies like Third Bridge, but would be useful for any company that deals with the Fintech or the Insurtech industry. 

Global Relations 

Relations between China and the West, particularly the United Kingdom, are going to be strong in 2018. They are already close and intense as never before in history. In particular, the economic exchanges, which constitute the principal pillar of UK-China bilateral relations, are tremendously successful. Bilateral trade volume will certainly rise in 2018. As pointed out by Britain's Chancellor of the Exchequer Philip Hammond when he met China's Premier Li Keqian in December 2017, China is one of the UK’s top trading partners globally. 2018 will see a fruitful and upward trend in bilateral investment exchanges which remains unbroken. Chinese people are part of the social fabric of the UK and as are many British expats who live and work in China. With their investments British companies will play a major role for China’s economy in 2018 by supplying cutting-edge technology and creating millions of jobs. 

Final Thoughts 

What's happening in China is always interesting because this is where the hope and drive is truly happening and it is clear to see. The good news for 2018 is that China has decided to maintain a prudent and neutral monetary policy as the world's second largest economy strives to balance growth and risk prevention. This paves the way for the economy being perfectly protected by any crisis that we may experience globally as pointed out above. 

The latest act in its economic success story may see China see a rise of salaries, rise in AI, rise in independent financial research – all of these aspects provide an extraordinary transformation for a country of its size and one with far-reaching ramifications.  

(Navjot Singh is a British author and journalist)