Fresh after a victorious cruise up the Thames to hold court in London, China is back to the business of building the world’s next great empire. As one of the world’s previous great empires, it behoves Britain to take note. The Chinese don’t make the rules of the global game. But they’re having a red hot go.
There are three items of note on China. First, the country’s planners will no longer ‘defend to the death’ the 7% GDP growth target. That news came courtesy of Premier Li Keqiang, a day after the People’s Bank of China cut interest rates for the sixth time in 12 months.
Does this mean China’s much ballyhooed age of consumer-driven growth is here? Well, maybe. You can walk from Tower Bridge to Blackfriars Bridge along the Thames each morning and hear more Mandarin spoken than English. The Chinese are travelling in their droves now. And they are a tourist force to be reckoned with.
But you don’t turn around nearly 40 years of investment in fixed assets over night. The 7% target was driven by the need to create enough jobs to sustain China’s massive internal migration. From the farm to the factory they came, and built China’s success (and huge forex reserves) on the back of this migration. It was all part of the plan.
The plan comes from the Communist Party of China (CPC). The CPC retains its legitimacy and popularity as long as it delivers ordered economic growth to the masses. The easiest way to do that is for government-directed investment in infrastructure. It’s still happening.
Caixin Online reports that China’s main central planning agency, the National Development and Reform Commission (NDRC) approved eight new infrastructure projects on 15 October. That’s eight projects for a total of 95 billion yuan, or £9.75bn. The NDRC announcement is aimed at shoring up GDP growth, especially in the struggling real estate, financial, and manufacturing sectors, according to Zhang Yu of Minsheng Securities.
It’s a brave Chinese security analyst who says anything that could be perceived as critical of the government these days. Some analysts were brought in for police questioning when they published ‘rumours’ about falling Chinese stock prices this summer. But this ‘rumour’ was actually a fact and thus safe to report on. The projects will include three roads, two railroads, two bridges, and the dredging of the Beijing-Hangzhou Grand Canal.
According to Caixin: “The most expensive project will be a 244 kilometre road linking the towns of Weiyuan and Wudu, in the North Western province of Gansu, that will cost some 37 billion yuan. The other two roads are a 96 kilometres highway from Jiujiang to Nanchang, cities in the eastern province of Jiangxi, and a highway linking the capital and Qinhuangdao, a coastal city in neighbouring Hebei Province. The two bridges over the Yangtze River are in Huangshi and Yichang, cities in the central province of Hubei. The section of the Grand Canal is in the eastern province of Zhejiang.”
Whether you can really trust China’s GDP numbers – or any government statistics for that matter – is beyond our scope. But with spending like that, you can see why Merryn remains optimistic about China’s ability to drive growth for investors. It was her big idea when I sat down to speak with her in August. And if you haven’t read the latest issue of the magazine, John and Merryn have put China on the cover. You can hear them explain why here.
As I said, you don’t shift from a production-driven economy (where the currency is kept artificially low to boost export competitiveness and favour chosen industries) to a consumption-driven economy (where a rising middle class spends money on the things it wants) overnight. It’s only a smooth transition in textbooks and in the mind of central planners. It’s never easy.
But it can happen. And if it does, the internationalisation of China’s currency, the yuan, will be part of the process. That’s the second item of news regarding China. According to Reuters, staff at the International Monetary Fund (IMF) are all set to give the green-light to the inclusion of the yuan in the International Monetary Fund’s (IMF) special drawing rights (SDRs).
If you aren’t familiar with the SDRs, count yourself lucky. It’s a sad commentary on the world we live in that investors have to spend so much time thinking about interest rates and the composition of the IMF’s reserve currency basket (the SDR). But in global geopolitical power circles, it is kind of important. The SDR is a status symbol.
If the staff has said ‘yes’ to yuan inclusion in the SDR, all that’s left is for the executives at the IMF to make a decision next month and announce it this year or next, then make the actual inclusion. If they say ‘yes,’ the yuan joins the ranks of the US dollar, the pound sterling, the euro, and the Japanese yen, as global ‘reserve currencies’. China will finally have a seat at the table in the room where the rules of the global money system are made.
Do you think having a large gold reserve backing the yuan has improved China’s chances of getting ‘in the room’ where the rules are made? I do.
That brings me to the final point about China. Let’s hope the currency war is as violent as the competition between the US and China gets. The USS Lassen, a destroyer in the US Navy, sailed within 12 nautical miles of the Subi Reef in the Spratly Islands in the South China Sea in the last 24 hours.
The Chinese have built the islands in the region to establish new ‘facts on the ground’ and establish territorial sovereignty in waters rich with oil, gas, and fishing rights. China’s destruction of coral reefs and the reclamation of nearly 2,000 acres of space through dredging is controversial with its neighbours. Vietnam, Malaysia, Brunei, Indonesia, Japan, Taiwan, and the Philippines all assert various claims on the waters of the South China Sea. By putting man-made islands there, China can claim a 12-mile exclusion zone around its ‘territory’.
What you’ve seen in the last 24 hours is the US Navy deliberately not recognising that claim. It’s certainly provocative. You wouldn’t expect China to retaliate, at least not yet. China’s economic strength hasn’t yet translated into a blue-water Navy capable of challenging the combined naval forces of US, Japan, and Australia.
A discussion of the geopolitics of the South China Sea is also beyond our scope, though. I’ll leave it for another time.
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Category: Economics