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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.
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Economic Insights Commentary by Bob Baur and the Economic Committee

Topic Summaries:

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

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