2018 was less than one day old when analysts started raising concerns about China’s ability to maintain stable growth in the 12 months ahead.
“Significant economic imbalances create downside risk to the outlook for 2018,” Rajiv Biswas, Chief Asia-Pacific Economist at financial information firm, IHS Markit, in Singapore, told Bloomberg on the evening of 1 January – warning audiences that the entire world economy could be at risk should the Chinese economy stumble unexpectedly.
Agreed Pauline Loong, Managing Director at research firm, Asia-Analytica, in Hong Kong. “Financial instability is the core problem,” she voiced in response to Biswas. “Even [China’s] own propaganda machine admits that this is such a serious problem that Beijing doesn’t expect there to be any solution in anything less than three years.”
What had happened? According to Bloomberg, Biswas and Loong’s reservations were likely founded in the combination of what Chinese leadership dubbed the “triple-threat” of domestic debt, poverty and pollution, and seething trade war threats against China from the US. Over the course of 2017, influential voices within the US business community had repeatedly warned that President Donald Trump was serious about “tough action” over Beijing’s trade practices. As the year ended, it became public that China’s 2017 trade surplus with the US had reached an all-time high of $275.81 billion (€225.6 billion) – making such sanctions more likely than ever before.
What’s more, Biswas and Loong may have also recalled the surprise yuan devaluation that hit global markets in August 2015 and led to a historic, albeit short-lived, market crash at the start of 2016. Reports of volatile housing prices and financial fragility in late 2017 could have easily evoked flashbacks of the disturbing experience, which contributed to the worst start to a year on record for both the Dow and S&P 500.
According to the World Bank, however, Biswas and Loong were most likely overreacting – at least with view to internal threats like financial flimsiness. In December, it not only raised its forecast for China’s economic growth in 2017 to 6.8 per cent from 6.7 per cent, but also reconfirmed growth predictions for 2018 and 2019 at 6.4 per cent and 6.3 per cent, respectively – driven mainly by the positive performance of Chinese tech giants Alibaba, Tencent and Baidu, which have soared so much in 2017 they’ve earned the nickname ‘BAT’ in the financial world.
The manufacturing industry also added to the notion of internal stability. China’s official manufacturing purchasing managers index, for example, was at 51.6 in December, signalling ‘improving conditions’. New export manufacturing orders also climbed to a six-month high, according to a sub-index; and the Caixin manufacturing purchasing managers index, which is more representative of the small and medium-sized enterprises segment, rose as 2017 came to an end – indicating robust economic growth.
With real disposable incomes rising eight per cent nationwide in 2017, consumers should have funds to save or spend, too – making for strong levels of consumer confidence and a positive outlook for the transport and logistics industry.
Does that mean Biswas and Loong’s concern was unfounded? According to Gordon Orr, a Director Emeritus of McKinsey, it’s not unusual for the Chinese economy to polarise, especially since the 2015-16 currency threat. While he is optimistic about the People’s Republic’s ability to reign in the financial market and balance the domestic economy in the year to come, he says the real linchpin is how China will present itself on the global stage.
“Despite stresses [such as] regional disparities, an aging population, declining heavy-industrial sectors, property bubbles, growth in debt levels and continuing environmental pollution, China remains slightly ahead of track of its goal to double GDP between 2010 and 2020,” he explains – adding that many global-scale Chinese companies are still mostly focused on China and impatient to scale elsewhere.
“[The real problem are] geopolitical discontinuities,” he adds. “Opportunities for Chinese companies to invest overseas have diminished in a number of markets…Relations with Japan and the United States remain volatile, with the potential for damaging discontinuities in trade and investment.”
According to Business Insider’s Linette Lopez, “this makes the economic health of the rest of the world incredibly important to China, because…it will depend on demand from the rest of the world to keep its economy going. It also means Trump’s promises to control imports from China to the US could make things particularly painful – if he follows through.”
One tool China is likely to employ to avert risk is the much-publicised One Belt One Road (OBOR) initiative, a gigantic infrastructure development program proposed by President, Xi Jinping, that focuses on connectivity and cooperation between Asia and Europe. “You can see why, in this environment, China’s government is so focused on [OBOR],” says Lopez. “The country needs outside money. It needs to use its oversupply of commodities like steel. It needs to put its companies to work, especially massive, heavily indebted quasi-state enterprises.”
Should the focus on OBOR offset whatever actions the US may take, Gordon Orr says China could be in for a more positive 2018 than Biswas and Loong expected. “Without this effect, we can look forward to a year of very positive developments in many sectors in China, framed by an environment of tighter and more centralised regulation and control.”
Global equipment specialist, SAF-Holland, started off 2018 with a milestone order from Chinese transportation business and trailer manufacturer, Changjiu, for the company’s lightweight axles and suspension systems. The delivery agreement – worth €15 million in 2018 alone – covers a period of five years, with delivery of the first systems already under way.
“Legislation is driving demand for modern disc-brake and air-suspension technology,” the company explained in a statement. “The main driver of the strong demand for weight-reduced truck and trailer components in China is the restrictions on the total weight permitted for vehicles and truck and trailer combinations, which were introduced in September 2016 (GB1589, ed.). This has sparked increasing customer interest in more sophisticated, weight-saving systems, such as those offered by SAF-Holland.”
At the same time, SAF-Holland explained, dimension limits and loading regulations introduced for the vehicle transportation segment came into effect, which has led to a “significant reduction” in the number of transportable vehicles per semi-trailer. As a result, experts assume that it will be necessary to expand existing transportation capacity in this segment by 20 per cent to 40 per cent.
“In addition, the new GB7258 regulation, which will take effect in stages, prescribes the use of disc brakes and air suspensions for all trucks and trailers transporting dangerous goods for safety reasons. Consequently, vehicles in this category will be required to use disc-brake technology starting in January 2019 and, additionally, air-suspension systems as of the year 2020. As a specialist in this field, SAF-Holland therefore expects to see favourable opportunities for further sales and earnings growth in China.”
SAF-Holland said it is already expanding its production capacity in China to realise the region’s regulation-fuelled growth, with plans to spend a “high single-digit million-euro amount” in a new central production centre that could help the company triple its sales in the region to well above €100 million by 2020. “By investing in a centralised, highly efficient production centre in the region, we are preparing for our future growth and are implementing one of the core building blocks of our 2020 Strategy, while improving our cost structure in the region at the same time,” summarised SAF-Holland CEO, Detlef Borghardt.