The year in review

While economies across much of the world were gasping for air this year, China took a deep swig on the stimulus bottle and was soon back into the swing of things.

In our final edition for 2009, WiC picks its way through the year’s Talking Point articles, in search of some of the more important themes.

No surprises. Growth at 8% or thereabouts…

The optimists said that it could be done (the cynics mutter that it is always pre-ordained) but growth is now expected to come in above Beijing’s minimum threshold of 8%. In fact, HSBC says economic performance was a lot stronger in the final quarter at closer to 10%. As a result, policymakers are watching inflation data closely.

Of course, many “China Risers” find special symbolism in statistics that compare China’s performance with America’s. And perhaps nowhere more so this year than in the auto industry. For the record, it looks like surging car and truck sales in China (12.7 million units are forecast to be sold for full year 2009) will overtake the 10.3 million vehicles sold in the US, according to JD Power and Associates. Rising incomes, as well as government sales tax cuts and part exchange programmes, have made for a record year.

Then there are the IPO volumes on the Chinese and Hong Kong stock exchanges, which will come in at almost twice the size of IPO business completed in the US ($51 billion versus $26 billion).

Or exhibit three: the foreign exchange reserves now piled up at $2.3 trillion (and counting).

Back in July (WiC26) we reported on a Brookings Institution study that found there was already enough stashed away to buy up all the land and property in New York, Los Angeles and Boston (at June 2009 prices).

All thanks to the stimulus programme?

Certainly, Rmb4 trillion ($586 billion) in government spending has been a core driver, with infrastructure investment figuring heavily.

In WiC’s inaugural issue in February, we talked about investment in the railways, and we returned to the theme a month ago (WiC37) to look at how bullet trains could end up stealing passengers from the local airlines. There were articles on other areas of stimulus largesse too, including reform of the electricity grid (WiC3), as well as reconstruction efforts in earthquake-hit Sichuan (WiC15).

Plank two of the economic revival plan was credit – and by year-end the banks will have disbursed an anticipated Rmb10 trillion in new lending. This stirred the economic pot and, as early as April, officials were ready to call signs of a return to economic health (WiC24). A couple of months later and the People’s Daily waxed lyrical on the economy’s “boundless vitality”, championing the heroism, foresight and constancy of the Chinese people. Other nations were reduced to looking on in envy, the newspaper reported.

But some say a case of buy now, and pay later?

There are a few Cassandras among the cheerleaders.

Like those who worry that lending standards must have been seriously relaxed to enable such a massive (and rapid) expansion of credit. Watch out for a potential ballooning in non-performing loans, they warn.

Others wonder how much of the credit splurge has ended up in local stock and property prices. Both asset classes have soared in value during the year.

Of course, stock markets elsewhere have boomeranged back from last year’s meltdown too. But the switchback ride on the Chinese bourses can be an especially frantic one, and regulators have struggled to steer investors onto a more predictable course.

One tactic – an 11-month ban on new listings – finally ended in July (WiC 21). And there’s now a new place to punt too; the ChiNext board in Shenzhen, which is on a mission to finance small, high-tech companies (WiC36). All 28 of the stocks debuting on launch-day triggered circuit breakers designed to slow price surges, and were periodically suspended. The average gain was still 110%, although stock values have since fallen back considerably.

Was it money well spent?

HSBC has – from the outset – offered a consistently positive assessment of most of this year’s spending package.

It says the bulk of it (about 60%) is going into core infrastructure rather than new industrial production or manufacturing capacity. And this is investment that the country still needs (China has only 6% of the world’s railway track but supports 24% of global freight transportation, for instance). The country’s ratio of national debt to GDP (still well below 20%) also means that it has the financial firepower to make long-term investments to confer multi-year benefits.

The Chinese government is now talking a much tougher game on wasteful investment and riskier lending too. So although stimulus efforts will continue on into 2010, last week’s top-level Economic Work Conference gave much more prominence to ensuring the “quality” of future spending (WiC42).

A specific concern has been to avoid over-investment in particular industries (WiC29), as well as to force consolidation wherever possible. That is easier said than done, with local governments keen to defend jobs and tax revenues. A European Chamber of Commerce report released last month thought the steel, aluminium, cement, chemicals, refining and wind power equipment sectors remained particularly ripe for pruning.

Others call for a wider “rebalancing”…

For many, China needs to rely a little less on what the government is spending and think more about how to encourage its citizens to spend more.

The logic is simple enough. China has exported its way out of previous downturns but the credit crunch has taken the bite out of overseas demand this time around. So state investment has taken up the slack – but this will reach a point of diminishing returns.

The talk is of “rebalancing”, to reduce dependence on exports (and, implicitly, on an undervalued renminbi), as well as to wean the economy off the emergency injections of government cash and loose bank credit.

On the face of it, local consumers have been resilient enough (retail sales figures in recent months have been up a minimum of 15% on last year). Subsidies and sales coupons from the government have helped.

But others counter that this is window dressing. The government would do better to boost spending on healthcare (now also a focus in the stimulus plan), as well as education and pensions. Some view that as the best way to make Chinese feel more secure, save less and spend more.

But China has been spending overseas, at least…

It has, and ‘new’ sovereign wealth fund CIC has been at the front of the queue (WiC40).

CIC had a shaky start (early investments in Morgan Stanley and Blackstone were hit by the financial crisis and the fund got a horsewhipping in the domestic media). But it now seems to have regained its investment appetite, with a range of deals with international commodity firms.

In fact, China’s tempestuous relationship with commodity producers has been another key theme for the year (WiC25/28/34). The breakdown of Chinalco’s proposed investment in Rio Tinto in June was the low point, and even had state news agency Xinhua hissing that Rio had behaved “like a dishonourable woman”.

Relations were not improved by the arrest of Stern Hu (Rio’s top negotiator in China) shortly afterwards, on allegations of improper approaches to Chinese steel firms. The case drags on.

Despite their protestations, Chinese firms have been unsuccessful in wrenching price reductions from the major iron ore suppliers. The demands of the stimulus programme (more infrastructure construction means more steel, which means more iron ore) pretty much cut off their negotiating effort at the knees. The miners just said no, happy to accept a browbeating while the spot price climbed steadily above their initial contract offer. China’s steelmakers ended up paying a lot more for their ore than if they had accepted the contract terms at the outset.

Limits to Chinese influence after all…

In iron ore, maybe. It’s another reason why Beijing is keen to have Chinese firms buy into natural resource firms at source, and not just rely on purchasing commodities on the open market.

On a separate tack, Beijing hasn’t seemed entirely able to keep unruly neighbour Kim Jong-il in line either (WiC10).

But in other areas there are signs of growing influence. And newfound confidence too: there were grand celebrations surrounding the 60th anniversary of the founding of the People’s Republic at the beginning of October (WiC32), and even a major naval review off the port of Qingdao in April.

Then there was the procession of US guests to the Middle Kingdom. Secretary of State Clinton and Treasury Secretary Geithner both touched down earlier in the year, and Obama himself arrived in Beijing in November (WiC38). Both international and Chinese media alike have detected a change in tone in the bilateral relationship, with the US now far more ready to treat the Chinese as “G2” equals.

The Chinese themselves prefer not to position publicly at so senior a level, even if they expect a commensurate global say.

But public statements from Beijing on the US fiscal deficit, or ruminations on an alternative reserve currency to the dollar are still entirely new departures. And this week China is leading the G77 of developing countries (or trying to) in Copenhagen (WiC41). Climate change remains one of its most pressing challenges.

It marks the end of a very busy year.

---

© ChinTell Ltd. All rights reserved.

Sponsored by HSBC.

The Week in China website and the weekly magazine publications are owned and maintained by ChinTell Limited, Hong Kong. Neither HSBC nor any member of the HSBC group of companies ("HSBC") endorses the contents and/or is involved in selecting, creating or editing the contents of the Week in China website or the Week in China magazine. The views expressed in these publications are solely the views of ChinTell Limited and do not necessarily reflect the views or investment ideas of HSBC. No responsibility will therefore be assumed by HSBC for the contents of these publications or for the errors or omissions therein.