China: planning ahead

More significant reforms, which would do more to unlock higher long-run growth, seem unlikely. Progress on the issues below would make us more confident in China’s long-run growth trajectory.

An interesting question is the extent to which other aims – specifically financial sector de-risking – could potentially generate meaningful change as a by-product. (De-risking aims to reduce the complexity and inter-linkages between banks and ‘shadow’ banks. More broadly, it gives greater attention to financial stability risks.) If regulators continue to emphasise financial risk, as they have recently, the share of state-owned enterprises could decline faster than official announcements imply. The recent problems of China’s second-largest property developer Evergrande illustrate the considerable challenges in reining in risks, while balancing growth objectives. With the company struggling to service its complex web of over US$120 billion of debt, the authorities had to decide whether, and how, to intervene.

China as green energy pioneer?

Major reforms are not a zero-probablility event. President Xi surprised at the UN with his announcement that China would aim to be carbon neutral by 2060. This is very ambitious and would require nothing short of a revolution in energy provision. There’s speculation it may require US$15 trillion of investment to achieve this goal.

Given that China accounts for around one-quarter of global greenhouse emissions, this plan clearly has the potential to reduce emissions worldwide. But carbon neutrality is not the same as zero emissions. We must wait for details about the scope of the target. For example, is international aviation included, and to what extent might offsets be used to achieve neutrality?

An ‘olive branch’ for strained relations?

Indeed, global climate issues could be one of the few remaining areas of international cooperation, potentially helping alleviate geopolitical tensions facing China. This has certainly been an area of discussion with the European Union. The degree to which tensions could ease will, of course, depend on the outcome of the US election. Environmental issues could perhaps provide some common ground in the event of a Biden presidency.

As we have noted previously, US-China tensions are likely to persist, regardless of who occupies the White House. Export controls ordered on China's largest chip manufacturer SMIC are a reminder that points of contention continue to morph from trade to technology and security. This serves to reinforce China’s long-run aims for self-sufficiency.

China’s economy perking up

Recent macro data has provided marginally positive news. Headline manufacturing PMI indicators were mixed: the NBS manufacturing PMI rose to 51.5 in September (+0.5pts), while the Caixin was down marginally (-0.1pts). But both surveys show the output sub-index at a high level (around 54). Moreover, export orders have now recovered, a potential signal that manufacturing outside China has worked through the worst of the dislocations. And recent import data for September was particularly strong, up 13.3% year-on-year (versus consensus of only 0.4%), signalling continued recovery in Chinese domestic demand.