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Qu shares his world view

Top China economist assesses GDP outlook and debunks ‘decoupling myth’


Qu: sees China GDP growing 5-6%

China’s ‘Two Sessions’ annual parliamentary gathering took place this month and did so during a period of heightened economic uncertainty. WiC spoke with top China economist Qu Hongbin about the various policy responses – such as tax cuts and increased infrastructure spending – to emerge from the ‘Two Sessions’.

Qu, who is HSBC’s Chief China Economist (as well as Co-Head of Asian Economic Research), joined us to discuss the outlook for the Chinese economy including explaining the findings of a recent research paper his team published debunking the idea that China is ‘decoupling’ from the global economy.

Last Friday in the Financial Times Evan Medeiros, the Georgetown Professor and former Obama Administration top Asia advisor, wrote an op-ed that stated: “China faces its worst economic outlook in two decades. Both the structural and cyclical drivers of growth are flagging as Covid surges. The [Ukraine] war has created historical price spikes and supply disruptions in its critical energy and agricultural imports.” Would you agree with his assessment?

Over the past two years China was the first to experience the pandemic’s outbreak and the first to impose a nationwide lockdown. It was also the first to reopen its economy and introduce stimulus. This saw the economy experience a ‘V’ shaped rebound during 2020. However, during the peak of the pandemic the economy contracted by nearly 7% year-on-year which is somewhat unprecedented

With geopolitical tensions in Europe, it’s fair to say that yes, the challenges and the pressures are unprecedented. However, it’s not fair to say that these specific challenges and problems are faced by China alone. Many of the issues, such as the pandemic, are common problems for everyone. These are global issues.

Where I disagree with the Medeiros assessment is that relative to their global peers the Chinese authorities possess more policy cushions for dealing with the problems. For instance, to deal with these economic headwinds Beijing’s policymakers have more room to cut policy rates and to reintroduce some fiscal stimulus in order to cushion the downturn. In contrast in the US and Europe – at this time of high uncertainty – they are still having to deal with high inflation. That puts those governments between a rock and a hard place – dealing with recession risk but also inflationary pressures. But in China’s case, since the country was first-in, first-out of the pandemic outbreak they were the first to normalise last year both monetary and fiscal policy. That now leaves more room to reintroduce mini-stimulus. So in terms of dealing with the current headwinds, I think China is relatively better placed to cope.

Leaving aside the pandemic and geopolitical risks – China faces underlying structural issues. The aging population, for instance. The debt burden is another problem that gets talked about. However, my sense is that many analysts outside of China overplay some of these negative structural concerns and overlook some of the more positive structural factors by comparison. I think the existence of the latter – such as the growing middle class – will help China to maintain a decent economic growth rate. That is to say – long story short – I still think there is a good chance for China to achieve 5-6% GDP growth in the years ahead.

Over the past two decades it is true to say there have been quite a few ‘doomsayers’ on the Chinese economy – meaning those who forecast China would go into recession or fall short of its  growth targets. They were not proven correct. In your opinion, are the doomsayers still going to be proven wrong about the Chinese economy in 2022 and 2023?

Over the past 20 years the government has never missed its targets – and 2022 is a very politically important year, with the government reshuffle and the 20th Party Congress.

No one tells the Chinese government they must have a growth target. In fact, they could easily have said that given there is so much uncertainty around the world we won’t release a target this year. However, the fact that they still choose to release a target tells you a lot. They want to manage expectations and manage confidence.

During the Two Sessions parliamentary gathering that took place this month Premier Li Keqiang announced a very large Rmb2.5 trillion tax cut. What’s your view on how quickly that tax cut can hit the real economy?

The number you mention refers to the annual budget and so applies to the entire course of this year. The timeline is anytime between now and the end of the year. Some of the cuts could feed through pretty quick because they are fairly straightforward, but some of them will need to go through different levels of government and then it will be up to the local government to really deliver, so might take longer to impact. I think by the middle of the year, we’ll probably see around half of that tax reduction figure making an impact and feeding through to the corporate sector. The rest will occur in the second half. The reason I am saying that is because normally the government has a quarterly review process in terms of the implementation of policy – so it needs a few months for the central government to check the cuts are making their way through local government into the real economy and how much delivery there is; or whether there is a problem with delivery. But by the middle of the year, I predict half will be delivered to the corporate sector.

Last week Liu He, best known as President Xi Jinping’s top economic advisor, made a fairly significant announcement that drove up markets dramatically. He said policies would be introduced that are “favourable to the market”. Do you think that one of the areas he was hinting at was that the private sector need not be so worried about new regulatory crackdowns occurring in the next few months – unlike what was experienced in the prior couple of years and disturbed confidence in, for example, the tech sector? Was he hinting that the pause button has been hit on new regulatory measures?

The market spent two days selling off and then Liu He came out and it wasn’t with the normal kind of post-meeting statement you’d usually have seen from his Financial Stability and Development Committee. Moreover, he also spent time to do quite a detailed Q&A with one of the key state media. In this, he specifically addressed all the sensitive topics that investors and the market have been concerned about. It was very targeted and the purpose was very straightforward: he wanted to assure the investment community he knew what they were worried about and said they didn’t need to worry too much about this issue, we’ll take care of that.

So the answer is yes: they understood the concerns and were saying you don’t need to worry about new regulatory crackdowns. Unlike the ongoing geopolitical tensions – which are something totally out of Beijing’s control – a lot of these sensitive issues were about government regulations and policies. So once they realised the issue and realised they wanted to fix it, it can be fixed fairly quickly.

Another big announcement that came out last week via Xinhua’s reporting was that the government also planned to pause its proposed property tax. Does that suggest to you that the government recognises the property sector is quite fragile – particularly with all the earlier mentioned economic headwinds – and needs to be protected?

This is another piece of clear evidence that supports the shift in policy focus – away from the de-risking last year towards supporting the economy and growth. Even late last year the standard view was that a property tax was going to be introduced because it was a part of the Common Prosperity policy drive. But now the finance minister came out and said we’re not going to introduce it this year. It’s the same logic as for the pause on new regulatory moves we just discussed. There is some legitimate arguments for introducing a property tax in China over time and also to implement more regulations in a few sectors, but that doesn’t mean you have to do it overnight, in a brutal way. You can do it in a more predictable, transparent and softer way. In my view the government realised what they did last year was an overshoot. The government has almost admitted it recognises that fact without specifically saying it.

Everything now is about the priority of having a more stable macro-economic backdrop for the rest of this year. Everything else has to work around that priority.

The other thing to come out of the Two Sessions was a 6% increase in spending on infrastructure, as a means to support the economy. Obviously over the past 20 years China has been famous for its large and transformational infrastructure spending – such as building 30,000km of high-speed rail track. However, is government spending on infrastructure still as efficient as in the past, in your view, or have we hit the limits on the effects new infrastructure spend can have on the economy?

After 2008 and the global financial crisis, much of China has benefited from the government’s spending on first class infrastructure. As a result of this, the list of ‘much-needed’ infrastructure projects becomes fewer and fewer. So the marginal returns or multiplier effects of infrastructure spending versus 10 years ago has become smaller. But China is a big country and still needs a lot of infrastructure. I’ll just give you one set of numbers that relates to subways as an example. In the last 10 years more than 30 cities have built brand new or have upgraded their subway systems simultaneously. This never happened in human history. In Europe and the US these expansions happened over much longer periods of time. Such spending is one reason why China became a big consumer of commodities – because you had 30 cities making these massive construction outlays on subways. As a result, you now have something like 35 cities in China running pretty decent subways today.

However, does that mean there’s no more need for China to build a single mile of new subway? The answer is, not really. China has more than 600 cities and more than 60 of these have more than three million residents and are still growing their population by 3-4% a year and yet still don’t have a single mile of subway.

So put it into the Chinese context. In spite of the enormous infrastructure boom that has already happened, there’s still room for smaller cities to benefit from government spending on long-term projects like subways.

So yes, the peak of China’s infrastructure boom is behind us, but China is a very big place.

You put out a research report in February entitled ‘Busting the Decoupling Myth’ in which you look at the numbers and say the widely held view in the international media that China has been decoupling from the global economy over the past few years isn’t borne out in the export and FDI data. In fact, you say the opposite is true. Can you talk about that report?

Every day if you open any international newspapers there are always stories about how China is decoupling and the diversification of supply chains away from China. If you really read that for a few weeks, you quickly develop the impression that China’s role as the world’s factory is over and China has isolated itself from the global economy. That’s totally wrong if you look at the data. That’s why our latest report sought to point out the facts: over the past three years the volume of China’s imports and exports with the rest of the world has been growing at five times the global average. In other words, China’s market share of merchandise trade, imports or exports or FDI [foreign direct investment] has been rising – and rising even faster in the past three years than it had been in the past, in spite of all the talk about trade wars, pandemics, reshuffles of supply chains and so on. The international trade data tells you the opposite.

Even on the FDI side you get the impression from the international press that the Sino-US trade war and tensions with Washington have meant US companies are withdrawing from China. Actually, it is not the case. US corporate investment in China has continued to grow in the past three years. Even the survey data from US Chambers of Commerce estimate that more than 70% of their members in China still have plans to expand their investments in China.

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