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Why a Bullish 2016 Doesn’t Spell Bad News for China’s Economic Growth

 5 min read / 

High investment rates, low wages, export-oriented strategies and progressive market liberalisation are some of the main ingredients of China’s unique and fast-paced growth that lasted almost twenty years.

Now, tighter monetary policy and attempts to avoid price bubbles, especially in the estate market, are all hints of a slowdown in China’s economic growth.

china gdp annual growth

Possible Outcomes for 2017

A fall in the price of the renminbi against the dollar last November, in part following the US presidential election, made the Chinese Academy of Social Sciences forecast a yearly growth of 6.5%, 0.3 points below last year.

Despite a predicted increases in both import and exports figures from to 2% to 4%, and 4% to 6% respectively, according to the Chinese Ministry of Commerce, the renminbi is expected to further depreciate against the dollar by 3% to 5% after the 7% loss in value last year.

china foreign reservesUSD:CNY 1 year chart

Instead, for Li Wei, an economist at the CBA, believes that China’s economic performance this year will depend on the global recovery: if exports to the US and the EU recover as predicted, China’s economic growth in 2017 has the potential to reach 6.8%.

Last year’s new house prices rose by a record 12.6%, and this figure is expected to rise further this current year, supporting economic growth, but still posing risks of speculative rallies, thus being a source of high concern for regulators.

The bullish performance in the bond market in 2016 is mainly due to relatively weak economic fundamentals, fast opening up of the market to all kinds of investors, innovation in bond products and consequent all time high issuances of green and panda bonds.

These factors created an increase in risks of default (53 bond defaults in ten months), spurring risk aversion among many investors. This emerged especially during the last quartile of 2016, with amplified concerns over liquidity stress, and with losses of around 1% in the price of China’s 10-year treasury futures for March delivery.

China’s foreign exchange reserves fell $12.3bn, to $2.998trn, but these figures do not take into account the borrowings outside China that may bring reserves down to $1.7trn.

According to Marketwatch, this amount cannot be enough to support the current pace of the renminbi exchange rate, not to mention a possible bust of the credit bubble. Analysts at HSBC pointed out that low domestic investment and increasing capital outflows are due a loss of confidence in the domestic economy. The main objective of policymakers should now be managing risk instead of focusing on growth targets.

china fx reserves

Moreover, it should be noted that the debt-to-GDP ratio is about 400%, a figure that was around 100% seventeen years ago. If a 6.5% yearly growth is still sufficient to meet China’s objective to double its GDP and per capita income by 2020 compared to the 2010 levels, it should consider increasing the level of borrowing, especially after last year’s decelerated growth.

The current pace of total financing may not be fully sustainable in the long term, and together with a lower growth can result, worst-case scenario, in a burst credit bubble.

china total financing

china loans

Why Slower Growth Isn’t Bad News

Research by Morgan Stanley pointed out that the crisis can be avoided for three main reasons:

  1. China’s debt has been funded through the country’s own savings, and it has supported new investment rather than consumption;
  2. Strong foreign and internal net asset positions can minimise any shocks;
  3. China can freely manage its domestic liquidity conditions thanks to a lack of high inflationary pressures, significant reserves of foreign currency reserves, and a current account surplus.

According to the Bank of China’s Economic and Financial Outlook for 2017, growth will stabilise during the year, especially thanks to the improved manufacturing sector, since last year was characterised by rebound of product prices, increased company profits and improvements made in tackling excess capacity. Consumption is also bound to increase, despite new regulations in the real estate sector and the car industry.

The Shift in China’s Economic Policy

Still, the rapid expansion of credit and lagging progress in addressing corporate debt, especially of state-owned enterprises, will increase the chances to go through economic slowdowns and disruptive adjustments. For this reason, the country’s central bank announced it would undertake a more neutral stance, and analysts at Reuters predict a raise in interest rates to both improve credit conditions and support the falling value of the renminbi, a prediction reinforced by the 3% inflation target for this year.

On the other hand, tighter credit can cause problems for market liquidity and debt prices, meaning that a careful balance of financial policies is needed to promote sustainable and beneficial growth, especially in the long term.

3% is China’s inflation target for 2017

The focus of Chinese policymakers should not be growth per se, but the risks of unemployment and a debt crisis related to it. As Helen Zhu, head of China’s equities at Blackrock said, the quality of growth is much more important than the quantity.

This is positively reflected by the Morgan Stanley forecast that the country’s increasing shift in high-value manufacturing and services will increase national per capita income from $8,100 to around $12,900 in the next decade, thus becoming officially a high-income country as compared to the World Bank’s official benchmark of $12,500.

In conclusion, this is one of China’s latest stages of transition from an export-oriented and led by investment economy, to a system more dependent on internal consumption. Without any doubt, China will be if not first, the second biggest economy in the world for decades to come.

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Asia

Google to Open Artificial Intelligence Centre in China

 2 min read / 

Google AI China

Google will be opening its first artificial intelligence (AI) research centre in China, despite many of its services being blocked there.

Fei-Fei Li, Chief Scientist of Google Cloud, said:

“I believe AI and its benefits have no borders. Whether a breakthrough occurs in Silicon Valley, Beijing or anywhere else, it has the potential to make everyone’s life better for the entire world. As an AI first company, this is an important part of our collective mission. And we want to work with the best AI talent, wherever that talent is, to achieve it.”

The research centre will focus on basic AI research, and will consist of a team in Beijing, who will be supported by Google China’s engineering teams.

Google’s search engine and its Gmail are banned in China. However, the country has 730 million internet users, making the market too large to ignore.

Google is not the only tech giant facing restrictions in China. Facebook is also banned, while Apple’ App Store has been subject to censorship. In order to comply with government requests, Apple removed many popular messaging and virtual private network (VPN) apps from its App Store in China earlier on this year.

China has recently announced plans to develop artificial intelligence, and wants to catch up with the US. However, human rights groups are concerned by China’s use of artificial intelligence to monitor its own citizens.

Keep reading |  2 min read

Asia

Trump’s Jerusalem Declaration: What Are Its Impacts?

 8 min read / 

Trump Jerusalem

‘Therefore, I have determined that it is time to officially recognize Jerusalem as the capital of Israel.’

President Donald Trump has further instructed the State Department to begin the process of moving its embassy to Jerusalem from Tel Aviv, with Rex Tillerson also engaging other countries to join in relocating.

In yet another bombshell, the President of the United States unleashed a wave of condemnation across the world. With the obvious exception of Israel, leaders left and right have rushed in to accuse Mr Trump of exacerbating existing tensions within the region; British Prime Minister Theresa May called it ‘unhelpful in terms of prospects for peace in the region,’ and UN Secretary-General Antonio Guterres deemed it as, ‘a moment of great anxiety.’

Palestinian authorities were outraged, with calls for another intifada to take place. The response by their Arab neighbours has seemingly been in similar vein. At the time of writing, protests have already broken out, with scores of Palestinians injured in clashes with Israeli troops across the West Bank and the Gaza Strip, and one fatally shot dead as of Friday.

The Multifaceted Aspects of Trump’s Move

There are a number of dimensions to consider when examining the implications of Trump’s latest move, and to simply label it as populist policymaking would not do it justice.

In that same speech, he talked about how he was a President that was finally ‘delivering’ in the elusive search for lasting Israeli-Palestinian peace where his predecessors had seemingly failed to do so for two decades. This self-aggrandizing is not new and has been characteristic of his presidency.

Yet, it must be noted that Trump is delivering – not peace and reconciliation, but on a campaign promise he had made. Trump is a charismatic showman, but even more so a stubborn politician. This move was made against th counsel of both Rex Tillerson, his foreign secretary, and defence secretary James Mattis, in favour of keeping a promise he had made to the American Israel Public Affairs Committee back in March of 2016.

As highlighted in the New York Times, Sheldon Adelson, a pro-Israel casino billionaire, is close to Trump and donated an estimated $25m to his campaign.

In fact, Mr Adelson serves as the single largest political donor not only to the Republican Party, but between both major parties, forking out millions in both 2012 and 2016. In addition to Mr Adelson and Jewish lobbying arms are the evangelical Christian groups that made switching to Jerusalem a top priority among their influential ranks. The numbers speak: in a 2014 Pew Survey, a staggering 82% of evangelicals were of the opinion that Israel was the land given by God to the Jews, with less than half of American Jews sharing the same sentiment.

John Hagee, leader of the Christians United for Israel, spoke of how, in each meeting with Trump and his Vice President Mike Pence, the embassy’s relocation to Jerusalem was brought up. Earlier this year, Pence, speaking at the Hagee’s group’s annual summit, described how the issue of moving the embassy was not an issue of how, but of when.

Trump’s move is aided further by the aforementioned Arab neighbours. To assume that the relocation would harm relations between the US and its Arab allies would be superficial, to say the least. It should be noted that the most important group of allies – Egypt, Saudi Arabia and the United Arab Emirates – are united with Israel, and by extension the US, on a number of key issues. These include the mutual belief of Iran being the region’s most dangerous destabilizing force, along with the acknowledgement of the Muslim Brotherhood as a terrorist group.

Saudi Arabia stands as the most peculiar case. As the birthplace of Islam and the location of the two of the three holiest Islamic shrines (in Mecca and Medina), Saudi Arabia sees itself as the custodian of the religion; the de facto guardian of Muslims across the globe. However, symbolism gives way to a ruthless pragmatism, spearheaded by the ambitious Crown Prince Mohammed Bin Salman.

Bin Salman, whose recent top-down anti-corruption measures have swayed public opinion in his favour, is close to Jared Kushner, Trump’s son-in-law. Adding to that is the alleged Saudi proposal, which, as reported by the Times, would lead to Palestine accepting limited sovereignty and a total forfeiture of Jerusalem. This, in effect, draws the Saudi regime close to Israel and the most anti-Islam administration in US history.

Are Arab Countries Indifferent?

Yet the current situation serves as a further reminder that the majority of leadership in the Arab world are, admittedly, indifferent to the Palestinian grievances. It is not aided by the status of these regimes – they are mostly unelected autocratic monarchies and thus do not reflect the will of the people. Further adding to that is how the Saudis’ onslaught on Yemen has further made a farce of any genuine Arab unity. A humanitarian crisis affecting millions of (mostly Muslims) is being instigated by the self-professed protector of all Muslims.

It would be naïve to neglect the Arab populaces in this discussion. Unlike their leaders who limit Israel-Palestine to rhetoric, the common Arab continues to see Palestine as an important symbol – representing decades of oppression, betrayal, and disunity. These same feelings form the foundations for extremism to be nurtured. Trump’s move reignites Palestine as a rallying cry for Muslims, who perceive his administration as being openly at war with Muslims.

Provocative populist nationalism serves its purpose in the short run, yet in the long run, especially in a region as volatile as the Middle East, it harbours even more anti-American resentment. Couple this latest move with Trump’s proposed travel ban, and the sentiment among Muslims is justified.

Terror groups, aided by social media’s ever-increasing role, prey exactly on people who are disillusioned and disheartened. The Islamic State, it must be noted, is far from being defeated, and this latest measure acts as a gift for recruiters with which to radicalise unsuspecting young men and women.

Extremist Islamic parties will also be in ‘celebratory’ mood, with those in US ally Pakistan being of particular importance. Designated terror group Laskar-e-Taiba’s (LET) founder Hafiz Muhammad Saeed (accused of terrorist attacks in India) was recently released, and has set his eye on national elections.

Terrorist groups based in Kashmir have called upon lone wolves to attack American and Israeli embassies around the world as a result of this, with the Gaza-based Al Tawheed Brigades firing rockets at Israel. Pro-IS media group Tarjuman al-Asawirti described how the US understood only the language of bullets, car bombs, IEDs and the slitting of throats.’

Exacerbating this situation is the lack of diplomats on hand skilled enough to mitigate the fallout from this, though it must be considered that a long-term strategy hasn’t exactly been characteristic of the Trump administration, at least not in foreign policy. Fadah Pandith, former special representative to Muslim Communities at the State Department, questioned the timing of Trump’s latest move-right before Christmas-and describes how it exposed Americans to greater dangers.

The Implications of the Decision

What does this pronouncement? Just another macho publicity stunt? Detractions aside, there is a positive element in Trump’s latest decision. Formal recognition of Jerusalem as Israel’s capital by the US to Israel will put the former in a position of greater bargaining. This bargaining can include asking considerable concessions on part of the Israelis.

As for the Palestinians, this latest development, according to Emile Nakhleh, former CIA Senior Intelligence Service member, can hopefully act as a jolt for the Palestinian leadership. Hamas has proven to be an ineffective governing body, whilst the Palestinian Authority (PA) has long been mired in rampant corruption.

Their legitimacies are now being threatened and, in the face of rapid erosion, this latest move by the US can help galvanize the need to speed up peace talks, contrary to assumptions that it was the final nail in the coffin. This is the scenario desired by Trump, but it is only wishful thinking.

In the long run, however, it must be noted that nuance and compromise are central towards preventing tensions from escalating. Trump’s announcement has opened the floodgates to a number of speculations on whether there will be another intifada and, more importantly, on whether the two-state solution is still viable. The latter notion has gained traction recently, with Palestinian politicians now expressing interest in a one-state solution instead.

Conclusion

Yet this may be, again, unrealistic. Gaith al-Omari, a former adviser to the PA, states how these are empty threats, and that a two-state solution must persevere, and will continue to do so. The bottom line is that the US will still have a significant role to play in Israel-Palestine-the lingering question is how significant it will be.

Most importantly, the solution drawn must ensure that it does not leave one side gloating, and the other humiliated and disgruntled, which this latest move has clearly been unable to prevent. The Israel-Palestine conflict will continue to fester and ruin the lives of millions in the absence of compromise and understanding.

Keep reading |  8 min read

Asia

Gandhi Wins Congress Leadership

Gandhi Congress

Rahul Gandhi faced no challengers in the race to succeed his mother, Sonia, as leader of India’s Congress Party.

Gandhi is the fourth generation of India’s Nehru-Gandhi dynasty and has been destined from birth to one day head India’s Congress party. However, the 47-year-old has an uphill battle if he is ever to follow in his predecessors’ footsteps and win the Indian premiership. India’s prime minister, Narendra Modi, is the country’s most internationally visible prime minister for a generation and cemented his position earlier this year by winning various state elections. Accordingly, the relatively inexperienced Gandhi will need more than his good name to unseat Modi and his BJP.

Keep reading |  1 min read

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