Why aren’t we talking about China?

    26 November 2016

    Every year in October, a group of investors, bankers and world leaders gather in Washington to discuss the year that was, and the year to come. Co-organised by the IMF and the World Bank, the three-day event is a fascinating exercise in high-level groupthink.

    Delegates arrive with local grievances, yet become immersed in ruminations about global issues, which dominate the public seminars and closed-door sessions. Conversation buzzes around what to do about a revanchist Russia, Europe’s death spiral, and America’s upwardly mobile debt ceiling.

    Then there’s China, the sleeping lion that has, as Napoleon prophesied, awoken to shake the world. At times over recent years, China seemed by far the biggest talking point in town.

    Until 2016, that is. This year’s shindig was alive with chatter about the threat of Islamic State and the head-scratching prospect of a Trump presidency. Yet the People’s Republic for once went largely undiscussed. At one debate, CNN anchor Richard Quest quizzed IMF chief Christine Lagarde and Bank of England governor Mark Carney on the state of the global economy, while Yi Gang, second in command at China’s central bank, sat passively alongside as questions on the Middle East, Brexit and other hot topics whirred over his head.

    ‘Curious, isn’t it,’ mulled Paul Sheard, chief economist at Standard & Poor’s, during a quiet moment at the Grand Hyatt hotel. ‘We’re so used to talking about China. And suddenly no one is.’

    The lack of interest was doubly curious, given that China’s economy faces its stiffest headwinds in years. That its economic growth is slowing — albeit slowly, and from a very high level — should come as news to no one. But the news gets worse. Private sector investment has all but collapsed, growing by just 2.5 per cent in the first three quarters of 2016 against 11 per cent last year and 19 per cent in 2014. In those nine months, private equity firms invested just 35 per cent of the amount they invested in the same period last year. Chinese share prices have yet to recover from last year’s crash: compare Shanghai’s Composite index, down more than 12 per cent this year, with the robust performance of the FTSE100.

    And China’s banks are in a woeful state. Francis Cheung, China strategist at brokerage CLSA, reckons failed loans make up 15 per cent of the total stock of bank lending — ten times the official estimate. In August, UBS warned that Beijing has reverted to a policy of quietly bailing out smaller, insolvent banks. Then there’s the looming debt crisis. As of July 2016, net sovereign debt was £20 trillion, or 237 per cent of GDP. Chinese companies owe nearly £15 trillion, about the same value as the entire US economy. While Western firms have deleveraged since the financial crisis, China Inc has borrowed recklessly.

    Should we worry? ‘Absolutely,’ says Xiang Songzuo, chief economist at Agricultural Bank of China. ‘I’m more worried about the economy than ever… Private investment is down, exports are down, retail spending is down.’ So much for government hopes of recasting China as a services- and consumption-geared powerhouse.

    So why was China not the focus of fretful delegates in Washington this autumn? One Hong Kong banker hazards a guess. ‘There are so many problems. Which do you choose? The debt crisis China cannot or will not solve? The massive problem of capital flight? The shabby quality of so many listed companies?’ Others are simply wary of predicting crises that fail to materialise.

    Yet a defining moment for China — and thus for the world, given how we’re all now economically intertwined — is coming. The only question is what form it will take. Some still expect a hard landing;
    others see growth slowly winding down. Yet another school sees China emulating Japan’s mistakes of recent decades and morphing into a slow-growth economy beset by deflation, debt and an unhealthy obsession with regressive stimulus measures.

    Then there are the wild-card prophecies, such as a property crash, which some analysts predict for next year. When house prices collapsed in the eastern city of Wenzhou six years ago, thousands of corporates, banks and grey-market lenders went to the wall.

    If that happens on a national scale, investors would be well advised to batten down the hatches and weather the ensuing storm. With hindsight, delegates at the IMF conference in Washington were probably wise not to make China a central feature of this year’s talking shop. It might have scared them silly.