A bruising trade war that has weakened the global economy will linger into the New Year and decouple the world’s two largest economies, with China increasingly looking inwards to sustain growth.
Beijing’s focus on its domestic consumption story is reflected in recent changes to its urbanization strategy by promoting mega-city clusters amid increased tolerance to slower growth.
China is expected to target an expansion of 6% for 2020 when its parliamentary session is held in March next year, which is lower than the 6-6.5% growth rate targeted for the current year. While this will help achieve Beijing’s goal of doubling GDP and income in the decade to 2020, it will also mean the third straight year of a slowdown.
China’s GDP in the July-September quarter fell to 6%, the weakest growth rate since the first quarter of 1992. It is expected to end the year with an expansion rate of 6.1%. GDP annual growth rate in China averaged 9.39% from 1989 until 2019.
Decoupling
McKinsey & Co said in a report that growing separation between the US and Chinese economies were already taking place in multiple areas – investment flows, supply chain, data flows, people flows, technology procurement and standards.
“In all these areas, further separation will occur in 2020. New areas of US-China separation will come into focus in 2020. Financial markets will be front and center,” it said.
The US-China Economic and Security Review Commission’s report recommended delisting Chinese companies on US exchanges that do not meet four different criteria – if the Public Company Accounting Oversight Board is denied timely access to the audit work papers, the company disclosure procedures are not consistent with best practices on US and European exchanges, the company utilizes a variable interest entity (VIE) structure or if the company does not comply with Regulation Fair Disclosure, which requires material information to be released to all investors at the same time.
“No Chinese company listed in the US meets all four, many won’t meet any. This threat covers around 500 companies with a cumulative market capitalization of about US$1 trillion,” the McKinsey report said.
China is already preparing for this showdown.
“Given the likelihood of the trade war morphing into a financial war or currency war, China also feels more than ever the urgency of beefing up its financial independence and sovereignty,” Zhou Yu, director of international finance under the Shanghai Academy of Social Sciences, said in an interview with the Global Times.
We have already seen a 74% plunge in capital raised by Chinese companies on the NYSE and Nasdaq this year and some Chinese companies are looking homewards for a listing as they enjoy higher PE multiples and authorities allow the use of VIE structures. Last month, e-commerce giant Alibaba issued shares in a $12.9 billion offering for a secondary listing in Hong Kong.
Urbanization
China is also allowing freer labor mobility and adopting a more market-oriented approach to promote the benefits of agglomeration in megacity clusters via land and Hukou reforms.
Morgan Stanley said in a report that with continued policy reforms and extensive commuter railways, the average population of China’s five key city clusters will reach 120 million by 2030, close to Japan’s current population.
It was referring to the areas of the Yangtze River Delta, Jing-Jin-Ji Area, Greater Bay Area, Mid-Yangtze River Area and the Chengdu-Chongqing Area.
The transformation would fuel productivity growth through increased urban agglomeration effects and allow China to attain high-income status by 2025.
“Investment in urban and rural infrastructure remains as one of the major growth drivers of China’s economy which will stimulate growth of fixed asset investment,” said Banny Lam, head of research at CEB International.
Consumption
Moving up the housing ladder increases consumption and this is what policymakers in China are targeting with the Chinese consumer still not overleveraged even if consumer retail spending in the first 10 months of 2019 rose 8% ahead of income growth of roughly 6%.
In August this year, China targeted increased consumption by allowing extended retail hours in many of its cities to promote “the night economy.” Under the scheme cinemas, museums, gyms, supermarkets and tourist sites will remain open for longer between the 6pm to 6am period.
This month, President Xi Jinping wrote an article where he said “the structure of economic development is undergoing profound changes, with central cities and city clusters becoming the major vessels for development.”
This strategy of promoting city clusters would allow a further concentration of manufacturing hubs and consumers in more advanced regions, with city clusters and hub cities becoming the key growth engines.
“With moderate house price growth and a positive year in domestic stock markets over the last year, the wealth impact on consumer confidence remained positive. Domestic consumption and investment will remain the key economic drivers, and China will deploy targeted stimuli to maintain momentum,” the McKinsey report said.