Monthly Economy Report

By Andrew Smith

Financial commentators expected a wave of China-related news last month and they certainly weren'€™t left lacking serious talking points. Rather than having to dig around for analysis from policy insiders and hedge fund managers, the recent Chinese People'€™s Political Consultative Conference gave the global media ample opportunities to hear directly from the real movers and shakers in the Chinese economy.

The conference was certainly a lively and intriguing affair, which culminated in the announcement of a new Five-Year Plan that is primarily geared towards maintaining an average GDP growth rate of 6.5 per year from 2016 to 2020. If the official targets are met then analysts expect to see China grow its gross domestic product from the current 67.7 trillion CNY to 92.7 trillion CNY by 2020. In doing so it is hoped that both the average person'€™s spending power and the general quality of life in China will increase dramatically over the period.

As expected, the highlight of the conference - at least as far as economists and financial minds are concerned - was Chinese Premier Li Keqiang'€™s insightful evaluation of the current economic situation and his country'€™s future outlook. Not surprisingly the Premier took to the stage and delivered a series of strong statements to the global media in which he repeatedly sought to reassure the world that China is still on track to become the next global economic superpower.

"We have long-term confidence in the Chinese economy and this confidence isn't without a foundation," Mr Li said at the end of the annual session of the Communist-controlled legislature. "As long as we persist with reform and opening up, China's economy won't have a hard landing".

During the question and answer session there were plenty of opportunities for both domestic and international media representatives to ask the noticeably well-prepared Chinese Premier about some of the key economic issues of the day. One of the more interesting questions came from an American journalist who wanted Mr Li's thoughts on U.S.- China relations going forward. The Premier'€™s response was broadly optimistic, stressing the need for both nations to engage in open dialogue about their differences and to work together on what he called the "areas in which both nations have common economic goals". Amongst the examples he cited was the need for both countries to ensure that business leaders and investors had better access to both markets, which will indeed be a very important issue in the coming years as more Chinese and American capital seeks to make its way across the Pacific.

Another key point that was raised by a Chinese journalist related to the ongoing difficulties some local governments are experiencing in meeting their pension payment obligations. In framing the question, the reporter cleverly addressed the broader point about "whether the central government will stand back and take a hands-off approach in such situations or will it step in to provide assistance". Once again Premier Li insisted that there has to be a balanced approach to handling potential economic and cross departmental conflicts. Namely, he stated, that local and municipal governments must "try their best to resolve problems but if they have done so and the problem persists then the central government will provide assistant when necessary". Although the context of the question related to a series of local issues it also related to the ongoing concerns about China'€™s public debt situation, which some international commentators and many financial insiders have been worried about for some time.

In terms of the data, there really hasn'€™t been a lot of good news to report on. According to figures from the National Bureau of Statistics, industrial production rose by an annualised rate of 5.4% in January-February of this year, the worst growth-rate recorded since 2008. The most recent data also revealed that Chinese exports fell 25.4% in February compared with the same month last year. It was the biggest monthly decline since 2009 and ahead of the 11.2% fall recorded in January.

Retail sales in the first two months of the year rose by 10.2% - below analysts' expectations of a 10.9% rise. Zhou Hao, an economist at Commerzbank, told Bloomberg that the mix of slower industrial output and retail spending "gives us a worrying picture", adding, that "the overall growth profile remains gloomy."

However, Zhou Xiaochuan, governor of the People's Bank of China, said that the government would be able to achieve a target of an average 6.5% in GDP growth for the next five years without implementing measures to stimulate the economy. "Excessive monetary policy stimulus isn't necessary to achieve the target," he said. "If there isn't any big economic or financial turmoil, we'll keep prudent monetary policy."

One of the key points that rarely gets anywhere near as much coverage as it should these days is the regional economic disparities in China. An interesting study by Jeff Desjardins recently highlighted the fact that while there is a pronounced slowdown in the macro economy there are still some incredible pockets of very fast GDP growth and development. According to the study, the four regions that now stand out as the key drivers of the country'€™s future GDP and productivity growth are Inner Mongolia, Tibet, Chongqing and Tianjin. The first two regions are seen to be very important going forward. Disjardins points out that Inner Mongolia - which saw an average of just under 20% annual GDP growth from 2005-2010 - "is extremely rich in natural resources. Making up 12% of the country's land mass, the region holds 25% of the world'€™s coal reserves and also produces rare earths, natural gas, and other commodities. Inner Mongolia has the highest installed wind power capacity in China, and the region is also the country's largest livestock producer". Similarly Tibet has a wealth of untapped resources and it is currently undergoing a staggeringly swift phase of urbanisation and diversification of industries that will be game-changers in the medium to long term.

The two megacities of Chongqing and Tianjin are definitely raising the bar right now when it comes to overall growth and creating economic opportunities. Chongqing is a sprawling metropolis of more than 30 million people which is leading the way in many key growth sectors such as automobile manufacturing and steel and aluminium production. In 2015, the city saw outstanding GDP growth of 11%. Likewise Tianjin, as we all know, has long been a world class hub for industrial production -€“ particularly with regards to hi-tech products. It too saw a high GDP growth rate last year of just under than 10%.

The major take-away here is that the slowdown, that is undoubtedly happening across the economy as a whole, is masking some of the incredible bright spots of economic expansion and development that will continue to fuel the Chinese growth story over the next decade. As former managing editor of Business Tianjin, Josh Cooper, pointed out in his 2015 book The Dragon Delusions, "trying to assess the state of China'€™s economy by painstakingly gauging the average of the entire country is about as useful as measuring the average temperature of Europe... we really need to look at what is happening on a region by region basis if we want to understand what the future looks like".

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