Attempts to assess China’s macro-economic outlook have been complicated by the ongoing trade dispute with the USA. Greater negative risks are implied by trade tension. So far, consequences for China have been limited and the economy has performed solidly.
Several short-term indicators in recent weeks pointed to a slackening pattern emerging, but supportive influences in China remain prominent. Nevertheless, expectations of a slowing longer-term economic output growth trend have prevailed for some time. Evidence confirming that this change is consistently under way is awaited. Yet a gradual slowdown in the wider economy over the next few years is still seemingly a realistic view.
Trends in China’s economic activity are a crucial aspect of gauging trends in global seaborne trade volumes, given the large proportion of trade which is comprised of cargo movements to and from China. For this reason a new report on China’s economy, published at the end of July by the International Monetary Fund, provides a valuable addition to insights into unfolding events.
The title of the new IMF report, ‘People’s Republic of China – Staff Report for the Article IV Consultation’, provides no obvious clues about its value. A feature of the format is that significant aspects incorporate IMF economists’ analysis, accompanied by the official response of the Chinese authorities, thus providing sometimes differing perceptions. The new report merits more recognition and attention than the rather bland title may attract.
A broadly upbeat tone, modified by cautionary notes
Looking at the broadest measure of economic activity, gross domestic product, a trend of gradual slowdown in China is foreseen. GDP, representing all goods and services output, is projected to decelerate by 0.2-0.3 percentage points each year. After the slight acceleration achieved last year to a 6.9 percent increase, GDP growth is put at 6.6 percent in 2018, followed by 6.4 percent in 2019 and continuing in that pattern of growth-rate changes.
Moderating growth in 2018 reflects “the lagged effect of regulatory tightening and the softening of external demand”. The strategy of the Chinese authorities’ policies is a change of emphasis from high-speed growth to high-quality growth. As a key part of this strategy reining in credit availability is a priority. Mounting debt throughout the economy and the speed at which it has been growing, coupled with uncertainty about its quality and sustainability, has resulted in more determined attempts to restrain lending and improve its efficiency.
Rebalancing remains a major objective
Amid strong momentum in the economy recently, the IMF comments that the desired rebalancing has slackened. Rebalancing is a formal objective of the Chinese government, with the intention of shifting national dependence on investment spending towards consumption, particularly consumer spending, and from goods production towards services. In 2017 while investment growth moderated, in accordance with the overall plan, other signs suggested that rebalancing had not progressed much.
In the IMF’s words, during 2017 “growth became less dependent on credit, investment growth moderated, the current account surplus continued to decline, and the environmental clean-up campaign led to some improvement in air quality and energy efficiency. But many of the drivers behind the growth acceleration in 2017…slowed rebalancing”.
Although the rebalancing intention is widely viewed among economists as likely to be beneficial for the Chinese economy’s long-term health, it has some unfavourable implications for the global shipping industry. A large part of China’s remarkable upwards trend in imports of raw materials and fuels over the past decade and longer has reflected spending on infrastructure and other investment which has greatly boosted the country’s production of steel and many industrial products. A future trend of shifting away from this development model, towards a less production-intensive model is potentially a restraining influence on commodity import demand.
Beneficial implications of the Belt & Road Initiative
One aspect of China in which the international shipping industry has a particular interest is the much-discussed Belt & Road Initiative (formerly and still occasionally now known as One Belt One Road). The part of the BRI comprised of sea routes and ports within the 21st Century Maritime Silk Road is especially relevant. But the whole concept, including the accompanying Silk Road Economic Belt of land routes and infrastructure, is significant for shipping.
The new IMF report expresses a predominantly positive view of the BRI, stating that the concept has great potential for both China and participating countries. Among beneficial features “it could fill large and long-standing infrastructure gaps in partner countries, boosting their growth prospects, strengthen global supply chains and trade, and increasing employment”. A comment in the report’s appraisal section describes the BRI as “a welcome and potentially transformative initiative”.
However, IMF staff analysts suggest that some characteristics of the BRI as evident currently could be improved. The success of the Initiative, in the IMF’s view, would be enhanced by “more opening up by China”. Success would also be boosted by “a clearer overarching framework governing BRI investment, better coordination and oversight, more focus on debt sustainability of the partner countries and a transparent mechanism for dealing with project disputes, non-performance and debt service problems, as well as more open procurements and greater transparency over contracts”.
The response of the Chinese authorities to that assessment, included in the report, is worth noting. The Chinese authorities thought that IMF staff had “overstated concerns”. Furthermore, in the authorities’ view “project selection and governance were decisions of market entities and were already strong”, although “they saw scope for further enhancing coordination among agencies and risk assessment”.
Imponderables for international shipping
Features of China’s economy portrayed in the latest IMF analysis point to a broadly satisfactory outlook for the near-term future, summarised in its conclusion that “the economy continues to perform strongly and reforms progressed in several areas”. Yet this conclusion is overshadowed by the ongoing trade dispute with the USA, and consequences which are unpredictable in both duration and magnitude.
For the international shipping industry, continuation of a fairly robust economic activity trend in China is an essential component of a return to more balanced freight markets. If the trend suggested by IMF analysts – gradual slowing of China’s economy over the next few years coupled with the measured rebalancing implied – proves achievable, adjustments will be required in global shipping markets. But these potentially could be accommodated without too much upheaval. A number of positive influences could be sustained, and growth impulses in some seaborne trades may continue.
Source: Article for Hellenic Shipping News Worldwide by Richard Scott, managing director, Bulk Shipping Analysis and associate, China Centre (Maritime), Solent University
