Posts Tagged ‘GDP growth’

China’s Economy Is Not Normal. It Doesn’t Have to Be.

March 14, 2018
Credit: Matt Chase

WASHINGTON — China’s extraordinary growth over the past few decades has spawned two major lines of analysis. One school of thought holds that China is a rising economic power poised to conquer the world. The other argues that China’s economy has become so distorted that it is bound to collapse or, at least, as a former United States Treasury secretary suggested, “regress to the mean.”

Both views are mistaken.

For one thing, China has never been a normal economy. It experienced an average of nearly 10 percent growth rates for almost four decades, a record; it is the first developing nation to become a great power. So why couldn’t it keep defying expectations?

What some take to be the Chinese economy’s weaknesses have, in fact, been strengths. Unbalanced growth isn’t evidence of a looming risk so much as a sign of successful industrialization. Surging debt levels are a marker of financial deepening rather than profligate spending. Corruption has spurred, not stalled, growth.

At least so far. The central question isn’t whether China might continue to confound norms so much as what, precisely, is required for it to do so. And that, as ever, hinges on whether the Chinese government can strike the right balance between state intervention and market forces.

Centralized authoritarian power has its benefits, including the ability for those who have it, at least in theory, to correct course rapidly. This has allowed China’s leaders to put the economy on a more sustainable growth path in recent years. The gross domestic product growth rate rebounded last year. Foreign reserves are back up as well. Wages have increased. The recent abolition of term limits for the president and vice-president’s terms gives President Xi Jinping more time and leeway to promote his vision of a more prosperous, modern and powerful China, and with the help of trusted advisers: His former corruption czar, Wang Qishan, is expected to be named vice-president and Liu He vice-premier in charge of the economy.

Skeptics about China’s future usually point to the country’s swelling debt. China’s overall debt-to-G.D.P. ratio exceeds 250 percent — but that is a fairly average level: higher than that of most emerging-market economies; lower than that of most high-income countries. More worrisome, though, is the fact that it increased by more than 100 percentage points, or nearly doubled, over the past decade.

The International Monetary Fund has cautioned that other economies that experienced such rapidly rising debt ratios — Brazil and South Korea a few decades ago, and several European countries more recently — eventually succumbed to a financial crisis. Why would China be any different?

One reason is that not all debt is created equal.

As some of the optimists note, China’s debt is public, not private, which means that the risks are largely borne by the state, which has deeper pockets. The borrowing is largely domestic, rather than external. And despite a surge in mortgages, Chinese households have a low overall debt burden compared to their counterparts elsewhere. For all its heady growth, China’s financial system also remains relatively simple, without the exotic securitization that nearly brought down the American economy a decade ago.

China’s debt ratio also seems more worrisome than it really is because its nature is often misunderstood.

China’s banks are no longer just serving state actors; now they also serve the private sector, notably after the privatization of state-owned housing in the late 1990s and early 2000s created a broad-based commercial property market. As much as two-thirds of credit expansion between 2005 and 2013 — including via unofficial or so-called shadow banking — went into property-related assets, helping establish a market price for land. Thus, rapid credit growth largely reflects an increasing financial sophistication rather than a property bubble or wasteful investments.

Still, the official figures can appear to suggest otherwise. By my calculations, property prices in China have grown sixfold since 2004. But property transactions are not included in gross domestic product assessments — which helps explain why debt levels have surged while G.D.P. has not.

That said, high debt levels dorepresent some fundamental weaknesses. As I detail in my last book, the tax revenues of local governments have not kept pace with their social expenditures, prompting those authorities to borrow from banks to fund public services. China’s large debt isn’t a debt problem so much as a fiscal problem in disguise.

The growing commercial role of local governments has, in turn, multiplied opportunities for graft. But this problem, too, is often misunderstood.

Corruption is said to impede growth by inhibiting investment. Not so in China, where the state controls major resources, such as land and energy, yet generates lower returns on assets than the private sector does. Privatizing those resources was a nonstarter under communism, and so corruption has served as a makeshift alternative, by allowing more private actors to use state-owned resources after striking arrangements with officials. Because those actors’ practices are more profitable, the economy has benefited overall.

Some China observers also are concerned that China’s speedy growth cannot be sustained unless consumption replaces investment as the economy’s main driver. (The Chinese government appears to agree, or claims to at least.) They point out that while investment accounts for an unusually high share of gross domestic product, consumption accounts for an unusually low share.

But to say this is to misunderstand the nature of China’s unbalanced growth.

The main cause of that imbalance is urbanization. Over the past four decades China’s urbanization ratio has increased from less than 20 percent to nearly 60 percent. In the process, workers from labor-intensive rural activities have moved to more capital-intensive industrial jobs in cities. And so, yes, an ever-greater share of national income has gone into investment as a result. But corporate profits have also risen, leading to higher wages, which have spurred consumption. In fact, even as the consumption share of G.D.P. has fallen, personal consumption has grown multiples faster in China than in any other major economy.

Eventually, China’s economy will have to become more balanced, as the government well knows. But the Chinese Communist Party’s plan for that is to have the state play the “leading” role in the economy while the market plays the “decisive” role in allocating resources. Squaring that circle can be tricky.

How will China’s leaders reform state-owned enterprises, whose profitability keeps declining (especially relative to that of private firms), when they still see those companies as national champions?

Mass urbanization is expected to continue, still not out of people’s personal preferences but at the state’s behest, by way of residency restrictions, evictions and forced relocations. Yet China’s planners now seem intent on redirecting migrants from megacities to smaller cities, and this could curb economic growth: As the World Bank points out, labor productivity is much higher in larger cities than in smaller ones.

Then, there is the corruption issue, which will require another delicate balancing act. Corruption has benefited the Chinese economy by, in effect, allowing the transfer of state assets to more efficient private actors. But over time such gains are being outweighed by the social costs of bribes, wasteful expenditures and growing inequities. Allowing corruption to run rampant could undermine the legitimacy of the Chinese Communist Party. Yet combating it with draconian measures could hurt growth by discouraging both officials and entrepreneurs from taking economic risks.

Hence the importance, and sensitivity, of Mr. Xi’s signature anticorruption campaign. It has been cast as an effort to discipline errant officials, but some see it as a means for Mr. Xi to purge political opponents or exert more control over society. It seems to have been popular so far: The general public perceives local officials as taking advantage of the system, and here is the central government appearing to rectify the situation. But some warn that the National Supervision Commission, a new agency designed to institutionalize anti-graft efforts, could signal overreach.

To discourage corruption effectively, the Chinese government will eventually have to leaven the rule of the party with more rule of law. In the meantime, some practical reforms would help, including creating a civil code to define acceptable commercial practices, basic property rights and the status of private companies. More sweeping — and more politically sensitive — reforms will also be needed to ensure that private actors have more access to major resources, like land and financing, without having to rely on personal connections to local officials.

The Chinese economy’s glory days may be over, but even a 6 percent growth rate over the next decade would be remarkable. At that pace, the economy would double by 2030 and likely become the world’s largest in nominal dollar terms. (It already is the world’s largest economy in terms of purchasing power parity.)

China’s remarkable success to date can be credited in part to its leaders’ willingness to set aside communism for pragmatism. Some observers worry that Mr. Xi is now reinjecting ideology into major policies, Mao-style. But he also is concentrating power and promoting action-oriented reformers like Mr. Wang and Mr. Liu — signaling his intention to address China’s social and economic needs even as he gathers the means to do so. China may not become a normal country for some time yet.


China’s Debt Pain Will Spur Long-Run GDP Gain, Morgan Stanley Says

March 1, 2018

Image result for shanghai, photos


The unprecedented deleveraging that’s rippling through China’s economy likely spells moderation for economic growth, consumption and investment, Morgan Stanley says.

But short-term pain will spur long-term economic gain, and risk of a big growth correction will be low, chief China economist Robin Xing said in a note Thursday.

“Growth quality will improve,” Hong Kong-based Xing wrote. Lower government and household debt ratios “could prevent excessive leverage build-up among local government and households, help overall debt-to-GDP reach near-stabilization by the second half of 2019, and ensure a healthy transition to a consumption-led economy in the long run.”

Xing said that more intense deleveraging, with regulators taking steps like banning shadow-bank financing for local government infrastructure projects, reaffirms his forecast that growth will moderate from 6.9 percent in 2017 to 6.5 percent this year. That’s in line with the median estimate in Bloomberg’s survey of economists.

Read More: How China’s Debt Curbs Could Start Weighing on the Economy

Policy makers will be especially attuned to growth impacts of policy tightening and potential spillovers from external risk, and will fine-tune the pace of deleveraging if needed, Xing said.

Morgan Stanley also projects slower broad credit and investment growth this year, with tighter scrutiny of local government financing likely to cut the pace of transport infrastructure investment growth by more than half, to 7 percent.

— With assistance by Jeff Kearns

U.S. GDP Grew 2.6% at Year End, Extending Strong Stretch — Federal Reserve predicts 2.5% growth again in 2018

January 27, 2018

Image may contain: 2 people, suit

U.S. President Donald Trump at the World Economic Forum in Davos, January 26, 2018


By Josh Mitchell
The Wall Street Journal
Updated Jan. 26, 2018 3:32 p.m. ET

Eight years into what has been an unexpectedly slow expansion, the U.S. economy appears to have picked up steam.

Business executives have reported solid quarterly earnings in recent weeks and pointed optimistically to investment and hiring plans for 2018, supported in part by federal tax cuts. Stock prices keep churning higher. And on Friday the Commerce Department reported that U.S. economic output remained on an above-trend path in the final three months of last year.

Gross domestic product—the value of goods and services produced in the U.S.—rose at a 2.6% annual rate in the fourth quarter, the government said. That didn’t match the second and third quarters’ above-3% growth rates, but it exceeded the 2% average that has prevailed since the early 2000s. Output grew 2.5% in 2017 as a whole, the most in three years, and the Federal Reserve predicts 2.5% growth again in 2018.

That puts the economy in unusual territory: not quite booming, but still gaining momentum deep into an expansion. The growth cycle that began in mid-2009 already ranks as the third-longest ever and is set to become the second-longest this spring. Rather than fizzling, the expansion is being spurred on by robust consumer spending and business investment. It isn’t near the vigor of the late 1990s, but that was the last time growth clearly accelerated this deep into an expansion.

“We don’t have a lot of history to guide us here,” said Richard Moody, chief economist of Regions Financial Corp. “It is unusual to see what looks to be a strong acceleration this late in the cycle.”


  • Heard on the Street: Why Consumers Can’t Keep Driving the Economy
  • Fourth-Quarter GDP At a Glance
  • How Hurricanes Hurt and Helped
  • Durable-Goods Orders Rose 2.9% in December
  • U.S. Employers Slowed Pace of Hiring in December
  • Tax Incentive Puts More Robots on Factory Floors

Investors cheered the latest evidence of an economy that won’t quit, driving up the Dow Jones Industrial Average by more than 100 points, or 0.4%, at midday.

President Donald Trump has pledged to return the economy to a growth rate of 3% or more, pinning his agenda on a $1.5 trillion tax cut he signed into law last month, a rollback of environmental, labor, financial and other regulations, and tougher trade positions. By Mr. Trump’s standard, growth didn’t measure up in the fourth quarter, but the pickup that has played out over the past nine months still has given the president something to boast about.

“There has never been a better time to hire, to build, to invest and to grow in the United States,” he said to business and political leaders in Davos, Switzerland Friday. “America is open for business and we are competitive once again.”

While many economists anticipate a further pickup this year, many also say 3% will be difficult to achieve over the long haul given an aging population and meager productivity growth.

Several developments are helping the economy perk up. Among them: Synchronized global economic growth and renewed investment spending by U.S. firms, who had spent years hunkering down. Those factors have converged with low unemployment, tame inflation, low interest rates and a booming stock market to bolster business and household optimism and spending.

Shelving manufacturer B-O-F Corp. of Aurora, Ill., spent about $750,000 to combine two factories into a larger, single plant that opened this year. The company, which builds slanted shelves in cases at grocery and convenience stores, is aiming to boost production capacity by a third with the new plant.

Jamie Knorring, B-O-F’s president, credits the rebound in the housing market with his company’s good fortune, including a fourth quarter that was the company’s best ever.

“When they’re building more houses, they need to build more stores,” he said, adding the company plans additional factory upgrades and equipment purchases this year.

The global upswing is driving sales for Rockwell Automation Inc., the Milwaukee-based maker of factory software and hardware, as companies in a range of sectors look to boost productivity. Rockwell said this week its fiscal first-quarter revenue jumped 7% to $1.6 billion, driven by sales to heavy industry and energy companies.

Through Friday, 26% of S&P 500 companies have reported quarterly results, and out of those 76.69% beat earnings-per-share expectations. The current growth rate for earnings compared with last year is 12.3%.

Firms that earlier in the expansion focused on boosting payrolls while labor was cheap now appear to be renewing investment in facilities and equipment.

Employees perform quality control inspections on 2018 Honda Accord vehicles.Photo: Ty Wright/Bloomberg News

Stronger domestic demand prodded Heartland Produce Co., which sells fresh fruits and vegetables to grocers in the Midwest, to recently add 4,000 square feet to its warehouse in Kenosha, Wis.

“With the economy being stronger and unemployment being low, people have more buying power and they’re spending it at the store,” Heartland President Bill Dietz said in an interview. He said his company might look at opening another facility this year.

Investment in business equipment expanded at an 11.4% annual rate in the fourth quarter after a 10.8% growth rate in the third, the best six-month stretch since a burst of activity in mid-2014, Friday’s economic-output report showed.

While they were investing more, businesses pared back their inventories in the fourth quarter, which helped to reduce output. Inventory rebuilding could boost output in the months to come.

Consumers are driving growth, too. Consumer spending rose at a 3.8% rate in the period, an increase last exceeded in late 2014. Spending on long-lasting items known as durable goods rose at a 14.2% rate, the fastest pace since 2009.

David Alter, 34 years old, spent much of the past decade building his savings and investing in stocks. In December, he bought a car and a second home, in Orlando, Fla., where he just started a new job as a technology manager for a major theme-park company. He said the new job coupled with a big rise in technology stocks he owns gave him the confidence he needed to take on a second mortgage, a fixer-upper for which he just bought a new heating and ventilation system.

“I feel very good on how things are performing,” he said of the economy. “But it does make me worry like when that’s going to stop. It can’t ride up forever.”

There are other reasons for caution. A chunk of the fourth quarter’s growth likely reflected a temporary boost in spending related to a pair of hurricanes that ripped through Texas and Florida last summer. Spending that was halted by the storms—such as restaurant visits by consumers and construction—was simply pushed back into the year’s final stretch. Likewise the storms spurred a temporary boost in spending on repairs and replacement items, like cars.

The global upswing is a two-edged sword for the U.S. Exports are rising, but so are imports. So while consumer spending is on an upswing, many of the goods Americans are buying are being produced abroad. That runs against Mr. Trump’s “America First” agenda. A widening trade deficit subtracted more than a percentage point from growth in the fourth quarter, the Commerce Department said. That came even though the dollar has weakened, a development that should be improving the U.S. trade position by making imports more expensive and exports cheaper.

—Andrew Tangel contributed to this article

Write to Josh Mitchell at

U.S. Economic Expansion Could Become Longest on Record

December 13, 2017

Economists surveyed by The Wall Street Journal see 43% probability of a recession in the next three years

A stack of the current income tax regulations sits on the dais during a House Ways and Means Committee markup of the Republicans' Tax Cuts and Jobs Act in the Longworth Building in Washington, D.C., on Nov. 6
A stack of the current income tax regulations sits on the dais during a House Ways and Means Committee markup of the Republicans’ Tax Cuts and Jobs Act in the Longworth Building in Washington, D.C., on Nov. 6 PHOTO: TOM WILLIAMS/CQ ROLL CALL/ZUMA PRESS


Forecasters are increasingly optimistic the U.S. economic expansion could continue beyond the 2020 presidential election, aided by Republican tax legislation that is expected to lift growth over the next several years.

The slow-but-sturdy expansion that began in mid-2009 already is the third-longest in U.S. history and, if it continues into the second half of 2019, will exceed the 10-year record set by the 1990s economic boom.

Most of the private-sector economic forecasters surveyed in recent days by The Wall Street Journal said the odds of a new recession by late 2020 were below 50%. The average probability of a recession in the next year was 14%, with the odds creeping up to 29% in two years and 43% in three years.

Economists were more pessimistic about the outlook before Donald Trump was elected president in November 2016. In the Journal’s October 2016 survey, economists on average saw a 58% probability of a recession starting in the next four years.

The lower recession odds could reflect a number of factors, not least the economy’s strong performance over the past year. Another possible contributor is legislation overhauling the tax code that Congress may soon send to Mr. Trump’s desk.

Some 90% of economists surveyed said the tax bill would increase the pace of growth for the next two years, with most seeing a modest boost to the annual growth rate for gross domestic product. Forecasters remain split over its likely long-term effects: Nearly half, 47%, said growth in the long run would be unchanged or weaker than its current trend.

Those results were similar to economists’ predictions in October, when the tax plan was in an earlier form.

A plurality of economists surveyed, 42%, said they believed the tax bill, if enacted, would make a recession in the next three years less likely than it would have been had the tax code remained in its current form.

“Tax reform will foster greater capital formation and economic growth,” said Thomas Kevin Swift, chief economist at the American Chemistry Council.

Some 37% said the tax bill would make no difference and 22% said it would make a recession more likely by late 2020.

Some of the economists who warned the tax overhaul would increase the odds of a recession pointed to the possibility of aggressive interest-rate increases from the Federal Reserve if the central bank feels fiscal stimulus will cause the economy to overheat and generate damaging inflation.

“Tax-cut stimulus, if fully realized as its framers claim, will make for a very aggressive Fed response, upsetting the apple cart,” said Rajeev Dhawan, director of Georgia State University’s Economic Forecasting Center.

As 2017 draws to a close, forecasters predicted this year’s strong growth would continue into 2018, and the odds of a near-term downturn continued to fall.

On average, economists projected GDP growth of 2.5% this year and 2.6% in 2018, followed by a return in 2019 and 2020 to the roughly 2% trend that has prevailed since the 2007-09 recession. Economists saw the pace of hiring moderating over the next year and the unemployment rate dipping below 4% by the end of 2018.

Some 68% of economists said risks to the outlook for growth were tilted to the upside, while 23% saw risks tilted to the downside and 9% said the risks were balanced. Upside risks included fiscal stimulus, while disruptions to foreign trade were listed by a number of forecasters as a downside risk.

The Journal’s latest survey of 62 business, academic and financial economists was conducted Dec. 8-11. Not every economist answered every question.

Write to Ben Leubsdorf at

Goldman says this may become the longest economic expansion in history


The longest expansion period in the U.S. economy may be underway

4:59 PM ET Mon, 8 May 2017 | 00:53

Since the financial crisis, the economy has never been called robust, but it may be in the longest expansion on record, with a couple more years to go.

Goldman Sachs economists said, in a recent note, that their model shows an increased 31 percent chance for a U.S. recession in the next nine quarters. That number is rising. But it’s a good news, bad news story, and the good news is there is now a two-thirds chance that the recovery will be the longest on record.

“The likelihood that the expansion will break the prior record is consistent with our long-standing view that the combination of a deep recession and an initially slow recovery has set us up for an unusually long cycle,” they wrote.

The current expansion has already lasted 95 months, now the third-longest in U.S. history in 33 business cycles going back to 1854, the economists said.

“Only the expansions from March 1991 to March 2001 [120 months] and from February 1961 to December 1969 [106 months] were longer,” they wrote.

The Goldman economists also say the medium-term risk of a recession is rising, “mainly because the economy is at full employment and still growing above trend.” They define a recession as a quarter of negative growth.

“The most obvious way to keep risk from rising much further would be a slowdown of output and employment growth to a trend pace before too long,” the economists wrote. This would require more Federal Reserve tightening than is currently priced in the bond market, they wrote.

April’s strong jobs report last Friday provided some comfort that U.S. economic growth isn’t flatlining, after a stream of economic data that fell below expectations. U.S. GDP grew at just 0.7 percent in the first quarter, and economists expect second-quarter GDP to be as much as 3 percent or even more.

While many economists were encouraged by the 211,000 jobs created last month and 4.4 percent unemployment rate, the Goldman economists, in a separate note, wrote that they see the potential for the labor market to overheat.

The economists say their model says “that recession risk at the 1, 5, and 9-quarter horizon is well explained by lagged GDP growth, the slope of the yield curve, equity price changes, house price changes, the output gap, the private debt/GDP ratio, and economic policy uncertainty.”

US Treasury says Senate tax plan would boost revenue $1.8 tn

December 11, 2017


© GETTY/AFP | US Treasury Secretary Steven Mnuchin said the Senate version of the Republican’s massive tax overhaul plan will boost economic growth to 2.9 percent over 10 years, which will generate enough additional revenue to offset the tax cuts

WASHINGTON (AFP) – The US Senate version of the tax overhaul plan would pay for itself over 10 years, boosting growth and generating $1.8 trillion in additional revenues, the Treasury Department said Monday.The Republican plan is expected to generate GDP growth of about 2.9 percent over the next decade, 0.7 percentage points higher than the current forecast, which will bring in more revenue to the government’s coffers and offset the deficit increase caused by lower taxes, according to a Treasury analysis.

Republicans in the House and Senate are working to come up with a final unified version of the reform that President Donald Trump can sign before the end of the year. Both versions call for slashing taxes for corporations and business partnerships while eliminating many deductions for individuals.

“The Administration has been focused on tax reform and broader economic policies to stimulate growth, which will generate significant long-term revenue for the government,? US Treasury Secretary Steven T. Mnuchin said in a statement.

Many economists doubt large tax cuts can pay for themselves, especially in an economy with not much more room to grow. Other estimates have forecast significantly smaller increases in economic growth as a result of the tax overhaul.

The non-partisan Joint Committee on Taxation estimates the Senate plan could add as much as a $1 trillion to the deficit by 2027.

But according to the Treasury’s analysis, the increased revenues from higher growth should exceed those lost to tax cuts by about $300 billion.

“These increased receipts are primarily collected in the last five years,” the Treasury said in a statement.

“We acknowledge that some economists predict different growth rates,” it added.

Economy watcher sentiment rises in Japan

December 9, 2017

Jiji Press

TOKYO (Jiji Press) — Sentiment among so-called economy watchers in Japan rose to its highest level in nearly four years in November on improved household spending and employment, the Cabinet Office said Friday.

The diffusion index gauging the sentiment of economy watchers, or people working in industries sensitive to changes in economic trends, including shop clerks and taxi drivers, compared with three months before rose 2.9 points from the previous month to 55.1 after seasonal adjustment.

The index rose for the third straight month and reached a level unseen since January 2014.

Japan’s Economy Boosted by Surge in Capital Spending

December 8, 2017

Japan’s July-September GDP growth raised to 2.5% from 1.4%

TOKYO—Japan’s stronger-than-expected growth offers another sign that Prime Minister Shinzo Abe’s economic policies, assisted by a global upturn, may be helping the nation emerge from years of stagnation.

A jump in firms’ capital spending amid optimism about the global economic outlook prompted a revision of Japan’s economic growth for the July-September quarter to 2.5% on an annualized basis, compared with an initial estimate of 1.4%, government data released Friday showed.

China’s growth will be ‘much, much lower’ when debt comes under control, expert says

December 7, 2017

  • China’s growth rate will be “much, much lower” when Beijing gets a grip on controlling debt
  • Beijing faces political challenges in getting a handle on debt growth

Here’s why China has not been able to rein in debt

China’s growth rate will be “much, much lower” when Beijing gets a grip on controlling debt, a finance professor at one of China’s top university said Thursday.

“I have absolutely no doubt that once Beijing is able get control of the growth in credit — which they are a long way from doing — growth rates are going to be much, much lower than the current growth rate,” said Michael Pettis, finance professor at Peking University.

In that scenario, equilibrium growth rates will be 2 to 3 percent, Pettis told CNBC on the sidelines of the Fortune Global Forum in Guangzhou, China. The country targeted growth around 6.5 percent this year.

So far, the Chinese government has achieved little success in reining in debt growth in the last five to six years, as the country has a GDP growth target that requires more growth than the economy can generate organically. “So, the only way to get there is with debt and with accelerating amounts of debt,” said Pettis, who was a former managing director at Bear Stearns.

Reducing debt, while challenging, is unlikely to spur a financial crisis in China as the banking system is still closed and very controlled, he added.

And although there are fears that a slowdown in Chinese growth will drag the world economy down, Pettis said it would not be as drastic as most imagine.

A 15-meter-tall panda sculpture hangs on the Chengdu International Finance Square building in Chengdu, China.

Anadolu Agency | Getty Images
A 15-meter-tall panda sculpture hangs on the Chengdu International Finance Square building in Chengdu, China.

“China is the biggest arithmetical component to global growth, but it’s not really the biggest contributor to global growth. What the world needs is demand, that’s the most scarce resource,” said Pettis.

However, China’s deleveraging will take a considerable amount of time to achieve.

“Deleveraging just means assigning the cost of debt to some sector of the economy, so the question is: Which is the sector that can absorb the cost with the least damage to the economy? And the answer is very clear and very straightforward: It’s the local governments and the local elites,” Pettis said.

As those entities grew faster than GDP in the three decades of breakneck growth in China, they will have to pay the cost of the debt now. Targeting them, however, is tough.

“There are the so-called vested interests. They are politically quite powerful so the process of forcing them to absorb the cost of the debt has been very difficult,” said Pettis.

US CEOs report record economic optimism as tax bill progresses — “Will level the playing field for US business to be globally competitive.”

December 5, 2017

© Getty/AFP/File | The Business Roundtable’s chairman, JPMorgan Chase CEO Jamie Dimon, said US CEOs’ high economic hopes were pinned on Washington delivering a pro-growth agenda
WASHINGTON (AFP) – US corporate leaders are increasingly upbeat about growth in the world’s largest economy as lawmakers prepare to enact deep tax cuts, the Business Roundtable said Tuesday.The group’s index of CEO sales projections, spending and hiring plans over the next six months hit its highest level in nearly six years.

The Economic Outlook Index rose to 96.8 points for the fourth quarter, up from 94.5 in the July-September period and the highest since early 2012. Hiring plans dipped slightly, but remained high.

CEOs project GDP growth of 2.5 percent for the year, in line with recent years but below the White House’s target of three percent.

The Business Roundtable’s chairman, JPMorgan Chase CEO Jamie Dimon, said the high hopes were pinned on Washington delivering a pro-growth agenda.

“To continue this momentum, it is critical that we enact pro-growth tax reform that will level the playing field for US business to be globally competitive,” Dimon said in a statement.

For the first time in six years, however, more CEOs cited rising wages rather than regulatory compliance as the top cost pressure for their companies.

– Rosy outlook on regulation –

After some last-minute snags, Republican lawmakers are inching towards the finish line in enacting the first sweeping tax code overhaul in three decades — despite official projections it could add $1 trillion to the budget deficit over 10 years and widespread criticism that benefits go primarily to the rich.

The House and Senate have to reconcile their different versions of the bill, which would cut corporate taxes to 20 percent from 35 percent.

Supporters say this brings the US tax regime in line with other developed countries and will encourage multinational corporations to repatriate their earnings. But effective corporate tax rates already are significantly below 35 percent, when the many deductions and loopholes are factored in.

Analyses of the Senate tax package say it will produce minimal to modest gains for the economy.

Economists at investment bank Goldman Sachs estimated this week the Senate bill could boost growth by 0.3 percentage points in 2018 and 2019, but could be minimal or even negative from 2020 and beyond.

Joshua Bolten, the Business Roundtable’s president and CEO, told reporters that Republican efforts to slash regulations and taxes “helped create the confidence for companies to increase their capital investment.”

The survey’s index for capital expenditure plans rose to 92.7 points, its highest level since the second quarter of 2011.

Xi Jinping’s post-party congress challenges

October 3, 2017

By John Wong
The Straits Times

China’s biggest political event of the year is set for Oct 18 and a key question is how the Communist Party of China plans to build on past success.

The Communist Party of China (CPC) with its membership of 85 million is not just the world’s largest but also one of just a handful of surviving communist parties.

The CPC is due to convene its 19th Congress on Oct 18in Beijing when its 2,300 delegates will gather at the Great Hall of the People to discuss new directions for national policies as well as to endorse the new line-up of China’s highest policymaking body, the Politburo Standing Committee. The climax of the meeting will be marked by President Xi Jinping’s delivery of the political report as the party’s general secretary.

The CPC is 96 years old. It held its first National Congress in Shanghai in July 1921 with only 12 delegates, including Mao Zedong. The meeting was convened by Mr Chen Duxiu, a Marxist academic from Peking University. Mao secured control of the party in 1935 in Zunyi city during the Long March. He was responsible for only the 7th Congress held in Yenan in June 1945.

Today, party congresses take place every five years. The 18th was convened in November 2012 under former president Hu Jintao, and the meeting endorsed Mr Xi as his successor.

Mr Xi has thus been the party boss for five years, having established himself as the “core leader” of China’s current fifth-generation leadership. He has successfully consolidated power through his relentless pursuit of the anti-corruption campaign, his drastic reorganising and reshuffling of China’s military, the People’s Liberation Army, and his promotion of many younger provincial leaders to top central positions. In a sense, he has become China’s dominant leader, much like Deng Xiaoping or even Mao.

As China is a rising superpower, what emerges from this party gathering should also have significant implications for the outside world. In terms of new policy direction, Mr Xi wants the meeting to discuss his strategy of developing China into a xiaokang (moderately affluent) society by 2021, when the CPC will celebrate its 100th anniversary. China has already become a showcase for poverty reduction. Mr Xi has recently drummed up efforts to finish up the task of eliminating all visible poverty in China by 2021.

But all eyes will be on new appointments at the highest echelons of the leadership. What is still left to speculation are the four new faces who will debut at the next meeting of the all-powerful seven-member Politburo Standing Committee. They would join Mr Xi, Premier Li Keqiang and Mr Wang Qishan. If Mr Wang were to retire, then there would be five new faces. This group will not only rule China for the next five years, but their appointments would have already involved sweeping personnel changes across the ranks. This, in turn, can also bring about policy change.

Straits Times Illustration by Miel

Even more significant is the succession issue. It is still not certain if the meeting will follow the tradition of making public Mr Xi’s heir-apparent, ahead of the next congress in 2022 when a handover is due.

Mr Xi has so far not made conscious efforts to groom anyone from the coming sixth-generation leadership to succeed him. If this matter were to be delayed, it would stir fresh speculation that Mr Xi might want to stay on beyond his second term. That would violate the conventional rule of a two-term tenure for the general secretary, as set by Deng. More seriously, it would result in a new pattern of dynamic power relations at the CPC’s top leadership tier – and with that, great political uncertainty.


Beyond power politics, the greatest challenge for Mr Xi is how he will steer the party and the country forward to the next lap. The CPC is arguably the world’s longest-ruling party. It has managed to stay in power for so long, since 1949, simply because it has been successful in adapting and reinventing itself to changes as well as in developing China into the world’s second-largest economy with the world’s largest foreign exchange reserves. The Soviet communist party collapsed because it had failed in reform and development.

Even more significant is the succession issue… Mr Xi has so far not made conscious efforts to groom anyone from the coming sixth-generation leadership to succeed him. If this matter were to be delayed, it would stir fresh speculation that Mr Xi might want to stay on beyond his second term. John Wong

The CPC started off as a revolutionary party. Under Mao’s able leadership, the CPC won the civil war and established the People’s Republic of China in October 1949. Mao was a great revolutionary leader, but too ideological.

He was good in mobilising people to fight battles. But his strategy of “continuing revolution”, as manifested in his Great Leap Forward and the Cultural Revolution (1966 to 1976), did much to ruin the economy and disrupt society.

After Mao’s death, power was eventually transferred to Deng, who led China on a new path of development following his economic reform and open-door policies. This had not only led to the resurgence of China, but had actually saved the CPC from collapsing like the Soviet communist party.

Deng’s policies of reform and economic development have been immensely successful, primarily because of his pragmatic and flexible policies. His concept of “socialist market economy with Chinese characteristics” is iconoclastic. Thus, he said: “If a capitalist country has a stock market, why can’t a socialist economy also have one?”

It is Deng’s policies and legacies that have given rise to China’s three decades of dynamic, double-digit economic growth.

In the run-up to a congress, it is quite normal for the party’s general secretary to ritually tighten up ideological control over the party and the state with a lot of Marxist rhetoric.

But Mr Xi seems to be much more serious on the ideological front than his predecessor Mr Hu. Some have argued that Mr Xi, politically very ambitious and already with the make-up of a strong leader like Deng or even Mao, wants to leave his own legacies much as Deng and Mao did. Mr Xi has recently made efforts to redefine his interpretation of Marxism so as to eventually become the Thought Of Xi Jinping, on a par with the Thought Of Mao Zedong and Theory Of Deng Xiaoping.

It is not certain if Mr Xi, having already centralised so much power to himself, will eventually move towards a new kind of authoritarianism. For practical policy formulation, he would do well to take a leaf from Deng’s pragmatism and distance himself from the doctrinaire approach of Mao. He might eventually come to realise the limits of combining the basic tenets of Marxism with the reality of China in this new era.


The preparation for this congress has been ongoing for months. The anticlimax will be when Mr Xi delivers his political report. After that, his new challenges begin: How to build on the party’s past success in reform and economic development?

For the economy, China has chalked up the most impressive growth for over three decades. What is left for Mr Xi is how to manage the economic slowdown amid rapid structural change and macroeconomic rebalancing.

China’s economy formally ended its double-digit high growth in 2012 at 7.7 per cent. Growth has since decelerated gradually in a small fraction of one percentage point a year – last year still registered a reasonably high growth of 6.7 per cent. In fact, growth for the first half of this year had rebounded to 6.9 per cent, the highest in this region.

With an increasingly larger base, the 6.7 per cent growth of last year actually generated more gross domestic product (GDP) than that of 2012, when growth started to come down. Yet, the international media has wrongly and persistently labelled China’s present lower growth as a “big slowdown”.

Ironically, Mr Xi himself was among the first Chinese leaders to openly embrace China’s lower growth as a “new normal”, something he said was “not really so scary”. Initially, China’s economic policymakers extensively used “demand management” (pro-active monetary and fiscal policy) to maintain growth. But that also led to rapid expansion of credit and loans, and hence, the problem of rising debt.

Mr Xi’s economic team under Mr Liu He soon recognised the perils of such debt-fuelled economic growth. Mr Xi then introduced “supply-side” structural reform measures to deleverage debt and to reduce overproduction. In this way, Mr Xi successfully stabilised the economic slowdown momentum. In the meantime, debt has continued to rise to 260 per cent of China’s GDP. But the government treated the rising debt as a long-term issue, to be gradually digested with continuing economic growth.

Mr Xi’s other long-term concerns include how to promote innovation for the emerging new economy. As China’s sources of economic growth have been significantly restructured from manufactured exports to domestic demand along with rising service activities, continuing technological progress will be needed to propel future growth.

Compared with sustaining economic growth, Mr Xi will find his economic reform agenda far more challenging. China has indeed carried out reform in many economic and social areas. As is often the case, the remaining area of reform, or the unfinished business of reform, is usually far more formidable.

This is particularly so for financial sector reform and state-owned enterprise reform, with the two being interrelated. They require much stronger political will.

It seems that when confronted with a problem, Mr Xi’s first reflex action is to resort to the party apparatus, usually by tightening up its control mechanism. Not surprisingly, the party has recently extended its role in the management of all major state-owned enterprises.

China is still a party-state, ruled by the CPC. When it comes to market reform, one need always bear in mind that even though the role of the market has been expanding rapidly, the state is still there and will always be there.

•The writer is a professorial fellow at the East Asian Institute, National University of Singapore.