Perkins – Page 2 – China Economic Indicator

Rising Commodity Prices in China Stoke Fears of Inflation

China commodity prices for such materials as iron ore, steel rebar, coal and copper soared to record highs in May forcing the government to intervene and curb cost increases for consumers.

As the world’s largest manufacturer and construction market, China has been the main driver behind global metal markets for more than a decade.
From January to mid-May, prices for steel rebar, hot-rolled steel coil and copper rose more than 30% as construction and manufacturing expanded in the world’s largest consumer of metal.

Other vital industrial inputs including iron ore, thermal coal, sulphuric acid and glass also roser to record highs as consumption outpaced supply.
China’s economic recovery accelerated sharply in the first quarter of 2021 after the coronavirus lull in 2020

The huge government stimulus measures launched at the height of the COVID-19 lock-down last year spurred construction activity, while the world’s largest manufacturing base capitalised on booming demand for appliances, exercise equipment and machinery in locked-down countries around the world from mid-2020.

With rising raw material prices stoking fears of inflation, the government is urging coal producers to boost output while investigate behaviour that may be bidding up prices.

Regulators in Shanghai and the steel hub of Tangshan warned mills this month against price gouging, collusion and irregularities, and said they would close businesses of those disrupting market order.

China’s commodity price rises have been further exacerbated by global shipping rates. The Baltic Dry Index (BDI) – a bell weather for dry freight rates – surged to a 19-month high underpinned by excess demand and COVID affected supply.

China’s Myanmar Dilemma

According to Myanmar’s Directorate of Investment and Company Administration foreign investments from China were around $139.4m from October 2020 to January this year. Myanmar’s financial year starts in October.

Chinese investments were exceeded only by Singapore’s, which totaled around $378.3m in the same period, the data showed.

Conversely, China is the top destination for Myanmar’s exports and the largest source of imports into the Southeast Asian country.

But trade is not the only reason Myanmar is strategically important to China. Oil and gas pipelines through the country help diversify China’s sources of energy and avoids the Malacca Straits, a hotspot for piracy.

Added to this the development of ports and overland connectivity between China and Myanmar help facilitate a Chinese presence in the Indian Ocean.
Beijing has in the past had a good relationship with both the Myanmar military, and the civilian government of de facto leader Aung San Suu Kyi.

However, Myanmar’s strategic importance may force China to choose a side. Particularly as it forms a key part of President Xi Jinping’s signature ‘Belt and Road Initiative.’

Bloomberg Predictions for Global Growth Contribution 2020

How SOE Re-structuring put the CCP in charge of the economy

Since the turn of the 21st Century, China’s State Owned Enterprises (SOEs) have undergone a dramatic transformation that is widely misunderstood. Since China joined the World Trade Organization (WTO), its trade surplus has ballooned and SOE share of total exports as dropped relative to private enterprise to become relatively small. To many, this shift is correlated with moves in the late 1990s to ‘reign in’ SOEs and restructure the economy along market lines. However, the real picture is more complicated and far more interesting than this common-sense conclusion. In fact, almost all of the 57 Chinese firms on the Fortune Global 500 list are SOEs.

This phenomenon is puzzling to those who would naturally assume that relatively inefficient SOEs should be out-competed by more efficient private enterprises in a market environment. To understand this paradox, it is important to understand the nature of the shift that occurred at the end of the 1990s.

At the time, Western government’s around the world assumed that Zhu Rongji’s efforts to reform the SOE sector was akin to Gorbachev’s Perestroika program. When in reality the goal was to move toward a much more sophisticated model.

While thousands of workers were let go and vast sprawling heavy industry plants cut loose, something else was also happening. SOE enterprises were quietly repositioning themselves away from highly competitive, export-oriented, downstream industries and consolidating their grasp over lower competition, highly monopolistic up-stream industries – for example, telecommunications, information transfer, storage, banking, energy, transport and post.

At the same time, this freed privately owned, competitive enterprises to concentrate on lower value, more volatile, export-orient industries. This restructuring also drastically increased demand for the intermediate goods, services and factors SOEs provide allowing them to charge monopoly prices consolidating the party’s control over the economy at large.

With SOE enterprises ostensibly under government control, instead of freeing the economy from SOEs, this upstream/down-stream restructuring created a hyper-profitable SOE sector capable of subordinating the private economy into lower value markets, consolidating State control over the economy at large.

World Bank Issues China Economic Update Synopsis

To download the full report click here.

COVID SHOCK

Conditions in China and the rest of the world have changed dramatically over the last six months. The COVID-19 pandemic has taken a severe human toll, caused the deepest global recession in eight decades, and inflicted enormous damage on jobs and welfare worldwide.

FORECAST

For China our baseline forecast envisions a sharp slowdown of growth to 1.6 percent this year, which would mark the slowest expansion since 1976. While supply side constraints have eased and economic activity has started to rebound, domestic and external demand remain fragile and restrain the pace of recovery, despite the swift measures taken to contain the economic fallout.

IMPACT

Even as economic activity rebounds, the shock is likely to leave the economy scarred. The pace of poverty reduction is expected to slow, reflecting labor dislocation and slower growth in household incomes. Our projections show that without additional policy measures, 8-20 million fewer people are projected to escape poverty in 2020, compared to the pre-pandemic scenario. Self-employed workers and those in less secure, informal jobs, particularly migrant workers, are being especially hard hit.

RISKS/POLICY

While risks are exceptionally high, they can be partially mitigated by good policies.

MONETARY.

Policy makers will need to ensure monetary and financial sector policies remain flexible to ensure abundant liquidity and keep market rates and bond yields low, easing the debt burden on households, firms, and governments. At the same time, financial risks should be managed carefully especially since the shock has further aggravated China’s debt levels, which were high even before COVID.

FISCAL/SOCIAL.

Fiscal policies would will need to play a critical role in supporting the recovery, and stimulus measures can should be designed in a way that contributes to achieving more inclusive, carbon-neutral and greener growth. The pandemic has amplified the need to close gaps in China’s social safety nets both to support distressed workers and households, and to help minimize lasting weakness of domestic consumption.

STRUCTURAL.

Accommodative macroeconomic policies to support demand could be accompanied by deeper structural reforms to stimulate a stronger, job-intensive recovery and to facilitate adjustment to the post-pandemic economy. Reforms to address barriers to labor mobility, including further liberalization of the Hukou system would facilitate movement of labor from firms and sectors suffering more persistent damage to expanding sectors, firms, and locations.

SUSTAINABLE AND INCLUSIVE RECOVERY

The pandemic shock has exposed deeply connected economic, social, and environmental fragilities, further increasing the urgency of achieving China’s objective of rebalancing the economy toward more inclusive, sustainable, and greener growth. The recovery offers an opportunity to accelerate progress towards these goals.