Oct 31, 2017 - suggest long-term interest rates will face eventual upward pressure. ⢠Asset allocation - a melt-up in tech: Large growth tech stock prices surged.
Economic Insights Commentary by Bob Baur and the Economic Committee
Topic Summaries:
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Xi Jinping – the next five years: Xi has gained authority to rival Mao and Deng, the two past transformative leaders of China. But, he will face problems in his next term: decelerating growth, a huge buildup of debt, and a need
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For the week of November 6 - 10, 2017
Xi Jinping – the next five years As President Xi Jinping looks ahead to his next five years as China’s president, he
for creativity and innovation in a country still rigidly controlled by the Communist Party.
appears to have several goals. He clearly believes the Communist Party should reign
Economic wrap: There was little economic data for
a stronger, bigger military that’s able to project strength around the world. And he
the week. But, in what there was, there were no signals the robust global economic expansion is fading.
past; China needs to “look outward, not inward.” Xi’s massive “One Belt, One Road”
supreme and be widely respected by ordinary citizens. Pollution is still a huge problem and he’ll push significant efforts to clean up the environment. Xi believes China needs seems to feel China should play a much bigger role in international affairs than in the initiative, which may total trillions of dollars of infrastructure spending and renew the original “Silk Road” of trade between Europe and Asia, is part of that drive. Xi has certainly acquired the authority to achieve those goals. Membership in the new Politburo and its Standing Committee, the key leadership group for the next five years, were announced, and no one is young enough to serve 10 years after Xi completes his new term in 2022. So, no successor or competitor is currently in view. According to a recent article in The Economist, the state media refers to him as “supreme commander,” a title not used since Deng Xiaoping.
Problems: But, the next five years will not be all milk and honey. Economic growth has begun to slowly decelerate and will continue. There were no growth targets set for Xi’s new term, which is tacit acknowledgement of that trend by Party o翿 cials. For this, there are several reasons. First, China’s labor force will start to shrink likely by the end of this decade, a long-term consequence of the one-child policy instituted in 1979 to curb population growth. The pool from which the labor force is drawn has been falling already for three years. Fewer new workers means fewer hours worked and thus slower growth. Further, after nearly two decades of double-digit wage gains, China is not nearly as competitive as in the early 1990s. Many Chinese companies have opened
Economic Insights • November 6 -10, 2017 1
At some point, China will need to deleverage after their enormous buildup of debt over the last three decades. . Bob Baur • Chief Global Economist, Principal Global Investors
manufacturing plants in the United States in recent years, testimony to reduced competitiveness. In addition, the super-fast pace of investment in China has dwindled, dropping from its peak of nearly 50% portion of gross domestic product (GDP). Capital spending has huge positive knock-on effects for the rest of the economy, so slowing investment becomes a drag elsewhere. Also, economic rebalancing to services away from heavy industry often lowers productivity growth, another drag on the pace of economic gain. At some point, China will need to deleverage after their enormous buildup of debt over the last three decades. Debt today is still growing faster than nominal GDP and has nearly reached a level as a portion of GDP that has brought financial crises in other countries. Any such crisis, though, is likely several years away since most of the debt is in state-owned enterprises (SOEs) and local provinces. Consumer debt is still low and household savings are very high, so there is still more debtholding capacity at least for a while. Further, China’s debt held by foreigners or denominated in other currencies is very low, an advantage. Officials are also trying to interest foreign investors in local and corporate bonds in China to spread the risk and open new sources of foreign funds. The recent announcement of eventually offering 51% or more ownership in Chinese financial institutions to foreign companies and investors, an historic first if it happens, is a further move in that direction. Last, with the emphasis on retaining and fortifying Communist Party control and consolidating SOEs into larger, still Partycontrolled entities rather than privatizing them, pursuing market-oriented reforms is clearly not a priority. This may not bode well for Xi’s push for a creative and innovative business environment. China ranks only 78th out of 190 countries in a recent World Bank study of ease of doing business. China also came in 93rd in starting a business and 119th in protecting minority investors. In the long run, true innovation comes from entrepreneurs and companies willing to risk time and money pursuing an idea. The basis for that willingness is the ability to reap the rewards of success. But, the right to keep the returns from gainful innovation comes from the rule of law and from strong institutions that support it and that treat everyone equally under it. If that really does come to China, the country will have an amazing future.
Economic wrap Overall, it was a slow data week around the world. But, there was little in the reports that did surface to change the picture of a robust global economic expansion that just keeps rolling on. The job market in the United States keeps tightening. New claims for unemployment benefits averaged over four weeks are the lowest in four or five decades, representing a record low as a portion of total employment. The number of unemployed workers is approaching the total number of job openings: 6.8 million versus 6.1 million. The unemployment rate is the lowest since 2000. Consumer confidence stays not far from the best since the 1990s. Lending standards generally continued to ease, especially for consumer and industrial loans and for consumer installment loans. We expect at least two more quarters of growth around 3% before some modest deceleration toward the end of next year. Consumption in greater Europe is a tale of two regions, with UK consumer spending very weak but retail sales in the Eurozone up nearly 5% over the prior year, and up 2.3% annualized in the third quarter over the second. Still, business surveys of UK purchasing managers remain robust. Similar surveys in the Eurozone are very strong with the strength broadening across the region. The Eurozone jobless rate has been falling about one percentage per year and is now at 8.9%, the least since early 2009. With political risk diminished, the Eurozone expansion still has a bright future.
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Recent reports in China were mixed. The balance of trade improved, but from a low level in September. Consumer price inflation rose a bit to 1.9% over the prior year since food prices did not fall as much as the prior month. Foreign exchange reserves were about flat, at $3.1 trillion. Vehicle sales generally stayed strong, up 2% over the prior year in October, but that level was lower than a similar 5.7% number in September. Business surveys were mixed for the month, but a bit weaker in total. There is clearly some deceleration, but the momentum is still there.
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