China delivering stability

In spite of its three decades of gradual market-oriented reforms, China remains an economy heavily controlled by the Communist Party.

Unlike other economic powers, Chinese authorities do not forecast; instead, they set targets, albeit loose, for economic growth and the factors that affect growth. Chinese economic indicators play a dual role, as a reflection of the current state of the economy but also as a statement about the government’s intentions.

To understand the general direction of the Chinese economy, the analysis of government targets should be complemented with policy directions expressed in key political meetings. Given that not all targets have the same priority, and that planning authorities adjust their goals, those forums help fine tune economic policy. The most recent one, which was concluded only last Thursday, set the targets for 2014, which were broadly unchanged from those set for 2013. The top priority for the country at this stage remains broadly unchanged: to deliver growth in a context of stability. That task is complex and delicate, because 30 years of rapid growth have generated a number of tensions in the financial and real estate sectors that need to be addressed in order to ensure future development. The country’s leadership has realised that previous rates of growth are not sustainable and are currently engineering a smooth deceleration that should result in a lower but healthier level of potential growth. In the framework, the target for gross domestic product in 2014 has been established at 7.5 per cent, unchanged from 2013.

Traditionally, GDP targets are set at a modest level that can be easily beat. In fact, in the last decade real GDP was largely above the target, to the extent that economists stopped using the government announced objective for growth as a reference. However, over the last two years of continued deceleration, the number acquired a new significance, as it started being considered the minimum level of growth that authorities deemed acceptable.

Last year, final growth came in at 7.7 per cent, slightly above the target but below most analysts’ expectations. This year, for the first time in decades, target and real number might coincide, as Chinese leaders have made very explicit that they are willing to let growth slip below the target. The implications of this position are manifold and can help framing the recent set of data.

Fixed-asset investment growth’s target was set at 17.5 per cent, lower than last year’s 18 per cent. Again, this is only a directional reference. In 2013, in a period of weak global growth and decelerating exports, China stepped up its level of investment in infrastructures via state-owned enterprises to make up from falling investment in the private sector. As a result, actual investment grew 19.6 per cent. However, in the latest political meetings, it has been made clear that the rebalancing of the economy away from investments towards consumption is now a priority. Therefore, it should be expected that, throughout 2014, levels of investment growth will decelerate while retail sales, the key proxy for consumption, should remain resilient.

The target for retail sales this year has been set at 14.5 per cent, unchanged from the previous year. However, in 2013, actual retail sales were not above but below the target. The fact that the investment target is reduced in spite of having been met with ease, and retail sales is maintained in spite of having fallen short last year, shows very strong intentions. Given this context, it becomes easier to interpret the combined January-February data released last Thursday. First, the pick-up in fixed-asset investments from 17.1 per cent in December to 17.9 per cent in the first two months implies a return to normality. Investment will not grow 20 per cent in 2014 but the December figure was well below average and Chinese authorities will not allow investment to deteriorate rapidly. The deceleration in industrial production is also consistent with the new paradigm in which overcapacity is to be reduced. However, the deceleration in retail sales, from 13.6 per cent in December to 11.8 per cent in January and February will probably be corrected later into the year. There is a political commitment to stimulate consumption and, if deceleration continues, measures will be taken later in the year to revert the trend.

Overall, China is committed to soft-land its economy using powerful policy tools to cushion the deceleration. The implications are far reaching, particularly for commodities exporters that grew in the last decade on the back of Chinese demand. This includes Gulf countries, which saw how China’s thirst for oil compensated the falling American demand in the last decade. There will be no abrupt disruption in 2014 but these countries should learn to live with a weakening demand from China over the next few years.

The writer is an economist at Asiya Investments, an investment firm specialising in emerging Asia investments.