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China started the year with the strong intentions to improve the quality of growth, vowing to reduce troubling risks in the financial system and to control rampant pollution.

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If there is a single Chinese word to describe China's economy in 2018, there may be no better one than gang, which translates to dispute and leverage.

Beijing started the year with the strong intentions to improve the quality of growth, vowing to reduce deeply troubling risks in the financial system and to control rampant pollution.

But in reality it was disputes - either between China and the United States, or with the Chinese private economy and state-owned enterprises - that dominated the headlines.

The world's second-biggest economy is expected to achieve the government's growth target of "around 6.5 per cent" this year, but the deviation from its original policy intentions, a mixed result of misjudgment, excess pride and uncontrollable external factors, have turned out to be very costly.

Unprecedented trade war

The Chinese government's strategy of making major purchases of US products managed to prevent the US China-bashing from damaging bilateral ties in the first year of Donald Trump's term as US president which began in January 2017, but that strategy was no longer effective in 2018.

Beijing's tough retaliatory stance in the face of the first US tariffs starting in July did nothing to deter more American taxes.

And by the end of September, Washington had imposed tariffs on half of the Chinese exports to the US and threatened to sanction the rest if an acceptable trade deal was not agreed by March 1.
How China is finding new ways to hurt US businesses
"We were relatively slow to foresee [the US actions] ... and underestimated [the Trump administration's] determination. Also, policy support was not well prepared," said Qu Fengjie, director of the external economy research institute under the National Development and Reform Commission.

The US' liberal use of decade-old trade law to justify its protectionist trade moves, the surprise arrest of Huawei chief financial officer Sabrina Wanzhou Meng on the same day that Chinese President Xi Jinping and Trump met in Argentina, the hard-hitting speech by US Vice-President Mike Pence at the Hudson Institute in early October, and US charges in December that China had engaged in a prolonged campaign of cybertheft for commercial advantage, all helped fan speculation that the world's two largest economies had entered into a prolonged "economic cold war".

"It's not simply economic friction, but a turning point of bilateral ties and a strategic adjustment of the US," warned Li Wei, an associate professor of international relations at Renmin University of China.

Despite the 90-day truce agreed on December 1, there remains a huge question whether a bilateral trade deal can be reached at any point, creating great uncertainty that is increasingly haunting the national economy.
US-China trade war: a timeline from first tariffs to the 90-day truce
The data suggests a further slowing of Chinese growth in the fourth quarter from the 6.5 per cent posted in the third quarter, with some suggesting a drop below 6 per cent in the first half of next year.

China's lowest first-quarter growth rate was 6.4 per cent in 2009, meaning a drop below 6 per cent would represent a record low since the National Bureau of Statistics started publishing quarterly figures in 1992.

The government's deleveraging campaign to cut excess debt and risky borrowing - one of the three major tasks laid out at the start of the year by the top leadership - sought to tackle the risk from the huge, and often hidden, debt accumulated in a decade of economic stimulus since the 2008 global financial crisis.

Risk from the deleveraging campaign

The country's debt-to-gross domestic product (GDP) ratio stood at 253 per cent of GDP at end of June, one of the highest rates in the world.

Beijing slashed its fiscal deficit ratio for the first time in six years, while a clampdown on shadow banking rippled to capital-thirsty private firms, local government controlled financing vehicles and public-partnership projects.
Beijing lowers economic growth target with eye on financial risks
"Its impact on the economy has exceeded expectation upon a variety factors, most notably the trade war, a shadow banking curb and environmental protection," Bank of Communications senior researcher Liu Xuezhi said.

"Particular, infrastructure investment has registered a free fall."

The infrastructure investment growth, a major government tool in previous rounds of economic stabilisation, plunged to 7.3 per cent in the first half of this year, compared to 21.1 per cent a year earlier.

And despite the offsetting measures that started in July, the slowdown continued, with January-November growth of only 3.7 per cent.

Li Yang, a senior researcher at the Chinese Academy of Social Sciences and a former policy adviser of the People's Bank of China (PBOC), said the deleveraging campaign was meant to avoid a financial crisis rather than exacerbate an economic slowdown.

"If it progresses too quickly - rather than having a controlled timing and pace in coordination with other policies - it could artificially create a Minsky moment or even Lehman Brothers moment," he said.
What can China do with US$17.41 trillion to stabilise economy?
Minsky and Lehman Brothers moments refer to the sudden collapse of a financial market or institutions, usually triggered by debt, currency or other issues.

The first is named after economist Hyman Minsky, while the second refers to the collapse of the US investment bank Lehman Brothers 10 years ago that rocked global stock markets and led to the biggest financial crash since the Great Depression.

A year ago, former PBOC governor Zhou Xiaochuan warned that China must stay alert for a Minsky moment.

After the first US tariffs were imposed on Chinese products in July, Beijing's policymakers continued the deleveraging campaign even though they shifted the policy direction to economic stabilisation.

At the Central Economic Work Conference in December, the top leadership vowed to carry on "structural deleveraging", paving the way for a bigger economic stimulus.
China decides to cut taxes on 'larger scale' in 2019
"It will become a long-term policy goal" rather than an immediate priority, Li said.

Structural deleveraging means structural changes among different sectors. For instance, the government can have higher leverage, but corporate leverage should be lowered, therefore the overall debt-to-GDP ratio will be kept roughly stable.

Private economy outcry

Private firms, the major victims of both financial deleveraging and the trade war, have been hit the hardest by the economic slowdown.

A total of 33 firms for the first time registered bond defaults by November 5, 28 of which were private firms, according to Everbright Securities, compared to only nine private firms in 2017.

In addition, dozens of private owners of listed firms risked losing their controlling stakes when the value of the shares they pledged to banks as collateral for loans fell with the rest of the stock market.
Billionaire's warning: long, cold winter is coming for China's private economy
As well as the decade-old problems of lack of access to credit and high fundraising costs, the governments support of state-owned enterprises to become bigger and stronger and feelings of those who wanted to eliminate private ownership turned out to be the last straw.

The desperate voices of entrepreneurs, which increased ahead of the celebration of the 40th anniversary of the reform and opening up policy, forced top leaders to emphasis the government's support for the private sector, including the introduction of new credit and tax policies to help small businesses.

Xi also rolled up his sleeves at a high-profile symposium at the start of November.

"Some argue that the private economy has completed its mission and will fade out. All these statements are completely wrong and do not conform to the party's policies," he told dozens of private sector representatives.

Lu Feng, a professor of economics at Peking University, said the arguments of those advocating elimination of private ownership were not well formulated.
Can China's leaders restore confidence in private sector?
"However, they do expose some inconsistency between our ideology and the reform and opening up reality," he said in December.

Lu said further reforms were needed to lower institutional costs and address the obstacles that businesses faced every day.

"Market access for private firms have been talked about for years, but many old problems remain unsolved," he said.

This article Surprise, war and miscalculations, China's turbulent economy in 2018 had it all and more first appeared on South China Morning Post

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Surprise, war and miscalculations, China's turbulent economy in 2018 had it all and more

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If there is a single Chinese word to describe China's economy in 2018, there may be no better one than gang, which translates to dispute and leverage.

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China’s Growing Unemployment Crisis
https://www.theepochtimes.com/chinas-growing-unemployment-crisis_2696734.html

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The losses caused by the Sino-U.S. trade war to China are the divestment of foreign investors and the relocation of the global industrial chain. Along with the resetting the industrial chain are capital outflows and unemployment for several developing countries, including China.

The United States has become a safe haven for global investors due to the reform of the tax system and the loosening of supervision. In August, there were 201,000 new jobs in the United States, and the unemployment rate was down to 3.9 percent. However, China's serious unemployment problem has become worse due to the massive withdrawal of foreign capital.

Unemployment Statistics With Chinese Characteristics

The Chinese regime has been expanding its censorship. In recent months, even negative news concerning the trade war, unemployment, loss of foreign exchange reserves, stock market and the real estate market have become sensitive topics subject to censorship. Despite this, there are still various methods available for measuring the severity of China's unemployment.

In mid-August, the National Bureau of Statistics (NBS) announced that the unemployment rate in urban areas nationwide was 5.1 percent in July, rising 0.3 percent from the previous month.

Scholars analyzing the Chinese economy never trust this kind of data. It might be called "statistics with Chinese characteristics." Starting this April, the authorities changed the method of measuring unemployment from using a "reported urban unemployment rate" to a "surveyed unemployment rate." Meanwhile, they also commissioned a team of team of experts to write a paper called "Comprehensive Analysis of the Surveyed Unemployment Rate Reflected in Nine Issues" to prove that the "surveyed unemployment rate" was more reliable than the previous "reported urban unemployment rate." However, all experts know that unemployment rate surveys "with Chinese characteristics" do not reflect reality either.

The data provided by the government only accounts for urban unemployment, and ignores the hundreds of millions of working-age rural unemployed. In 2017, the Meteor Federation of Journalists (also known as the Youth Media Association) conducted a survey on the actual unemployment rate and published its findings in an article titled "China's Unemployment Rate-the Hidden Truth."

Key points from the article may be reiterated as follows: the total Chinese population in 2016 was 1.383 billion, including 907.47 million people between the ages 16 and 59. Deducting 68.6 million students enrolled in high schools, universities, and vocational school leaves a working-age population of 838.87 million, accounting for 60.7 percent of the total population. According to statistics, the total number of employed was 774.63 million.

However, the study brought up a critical issue: Chinese peasants do not retire and are included in the "employed" category for life. Elderly peasants, defined as those over the age of 60, numbered 129.28 million, a number that must be subtracted from the total employment figure. As a result, the real number of employed, working-age Chinese was 646.75 million - a difference of 192.12 million compared with the total number of working-age Chinese not enrolled in education or training. By this metric, the real Chinese unemployment rate is 22.9 percent.

Demographic statistics from this year paint a mirror image of the 2016 situation. The real rate of unemployment is still over 22 percent, even without factoring in the effects of the Sino-U.S. trade war that began this March.

At present, there are three factors exacerbating China's unemployment crisis.

Dual Impact of the Trade War: Withdrawal of Foreign Capital and Surge in Unemployment

The withdrawal of foreign capital from China that began this year has become irreversible. Although the Chinese authorities maintain stubborn resistance to this shift, the Ministry of Commerce acknowledged at a regular press conference held on Sept. 20 that tariffs imposed by the United States on $200 billion worth of Chinese goods have affected six categories, including the electromechanical industry and light industries such as textiles. Among the affected enterprises, foreign companies accounted for 50 percent. The Ministry of Commerce claims the U.S. tariffs harm not only the interests of Chinese and American companies and consumers, but also the security of the global industrial chain. The last sentence refers to the fact that foreign capital is withdrawing or considering withdrawal from China.

On Sep. 13, the American Chamber of Commerce in China and the AmCham Shanghai published a survey conducted on more than 430 US companies in China. Thirty-five percent of the companies surveyed have transferred production from China to other countries such as those in Southeast Asia, or are considering doing so.

According to statistics from Japan's Kyodo News, 60 percent of Japanese companies have been transferred or are in the process of transferring from China to other countries, while the remaining 40 percent are deliberating on how to withdraw funding.

As for Taiwan-funded enterprises, the Japanese financial newspaper Nikkei reported on Sept. 16 that Taiwanese factories manufacturing shoes for Nike, Adidas, Under Armour and other brands have moved their production lines to Southeast Asia and India.

In order avoid the tariffs about implemented by Washington, even Chinese-funded enterprises and manufacturers are moving. Many Chinese factories are transferring their assembly lines abroad.

The Hong Kong-based Kerry Logistics Network Limited, Asia's largest shipping and logistics company, is currently moving its production lines for customers in different countries from China to Malaysia, Vietnam, Myanmar and even Laos.

What kind of impact does the withdrawal of foreign capital have on Chinese employment? A widely quoted figure is that according to official estimates, the total number of people directly employed with all foreign-invested enterprises is more than 45 million people. In addition, there are countless suppliers and upstream and downstream enterprises that rely on foreign capital to survive, involving hundreds of millions of people.

According to Bloomberg News, on Sept. 11, China's chief economist Zhu Haibin of JPMorgan Chase & Co. stressed in his research report the profound impact of tariffs on China: if the United States imposes a 25 percent tariff on $200 billion worth goods exported from China, and China does not retaliate, it may leave three million people unemployed. If China uses the following methods to retaliate, including imposing counter-tariffs on U.S. good and depreciating the yuan by 5 percent, then 5.5 million people will lose their jobs and the GDP will decrease by 1.3 percent.

China's AI Policy Leads to Structural Unemployment

Like many developed countries, the Chinese labor force faces increasing competition with robotic production.

A September report published by China Development Research Foundation and Sequoia Capital China, a venture capital firm, shows that several companies in export manufacturing industries in Zhejiang, Jiangsu and Guangdong provinces have reduced their labor pool by 30 to 40 percent over the past three years. In the past decade, Hangzhou Wahaha Group, a Chinese beverage company, has reduced the number of workers in its assembly line from around 200 or 300 to just a handful of personnel.

Robots competing for jobs once done by humans occurs in many countries, making unemployment an unavoidable trend in many cases. Some governments are considering various kinds of "robot taxes" to make up for the loss of human taxpayers.

Xavier Oberson, a professor and tax lawyer at the University of Geneva in Switzerland, advocates taxing robots proportional to their productivity-especially considering that a robot can generally replace more than one person. He recommended that funds accumulated through these taxes be used for social security funding and training for the unemployed.

South Korean and French politicians have also put forward similar proposals, hoping to use increased taxes to increase unemployment welfare. The Chinese authorities are aware of the increase in unemployment brought by AI, but apparently have not considered specific countermeasures.

Increasing Social Security Taxes Leads to Increased Unemployment

On Aug. 27, the State Administration of Taxation issued a tax reform to be implemented on Jan. 1 next year. The new policy introduces two major changes. First, it will be impossible for enterprises to conceal the actual number of employees and avoid paying social security taxes. According to the "China Corporate Social Security White Paper 2018" released by the independent social security agency 51 Shebao in late August, 73 percent of Chinese companies were not in compliance with state regulations, i.e. they were not paying the social security fees as demanded of the actual wages. After the new policy is implemented, the possibility of companies' escaping social security taxes will be greatly reduced.

The tax reform will increase the corporate tax rate from 31 percent (13th highest in the world) to the second-highest in the world at 44 percent.

The implementation of the new social security tax policy increases the burden on enterprises will increase. Many media have published articles discussing this issue. According to the author of "In the Next Year, Please Prepare for Unemployment," if a company pays one employee 10,000 yuan ($1,440) a month, the company needed only to pay the lowest social security tax in the past, but going by the new policy, the employee has to pay an additional 640 yuan ($92) per month while companies have to pay an additional 1,860 yuan ($268) per employee per month, making the additional cost for hiring an employee more than 20,000 yuan ($3,200) a year. For a small company with around 10 employees, it will cost an additional 200,000 plus yuan ($32,000) a year. The increase in costs directly reduces the profits of small and medium-sized businesses, which will be forced to lay off workers in order to survive.

The trade war has not yet ended, but its impact on China is gradually emerging. The Chinese Communist Party (CCP) does not want a trade war with the United States. Beijing has long acted as if opening up the market to Western countries is a special privilege it has afforded the West, while failing to recognize the thanks that China's economic prosperity owes to the international trade system.

Ever since 2003, when the CCP announced its "peaceful rise," it has been trying to change the international rules.

In 2014, Xi Jinping publicly proposed his diplomatic guiding principles: "It is necessary to comprehensively consider and use both international and domestic markets, international and domestic resources, and international and domestic rules."

Since the existing guardian of these rules is the United States, if the CCP were to rewrite and dominate the standards of international conduct, it would have to challenge the United States. But when the trade war came, it was unexpected, and China did not have enough assets for competition.
He Qinglian is a prominent Chinese author and economist. Currently based in the United States, she authored "China's Pitfalls," which concerns corruption in China's economic reform of the 1990s, and "The Fog of Censorship: Media Control in China," which addresses the manipulation and restriction of the press. She regularly writes on contemporary Chinese social and economic issues. Views expressed in this article are the opinions of the author and do not necessarily reflect the views of The Epoch Times.

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The losses caused by the Sino-U.S. trade war to China are the divestment of foreign investors and the relocation of the global industrial chain. Along with the resetting the industrial chain are capital outflows and unemployment for several developing countries, including China.

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China's Economic Slowdown Is Inevitable

https://nationalinterest.org/feature/chinas-economic-slowdown-inevitable-39992

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Hit by a trade war and a slumping global economy, China is desperately attempting to avert a slowdown in the world's second-biggest economy. Against all the odds, can Beijing pull it off?

On December 21, China's leadership signed off on an economic roadmap for 2019 that features aggressive stimulus measures, including tax cuts and monetary easing.

Yet Beijing's top officials are not optimistic. The statement released at the end of the three-day economic conference noted that "the external environment is complicated and severe, and the economy faces downward pressure."

The policymakers called for a "proactive fiscal policy" including tax cuts, exceeding the around 1.3 trillion yuan ($188 billion) already authorized for this year. They also urged a "prudent" monetary policy that is "neither too tight nor too loose," suggesting a softer stance from the central bank.

China's efforts to rein in escalating debt levels may also be wound back slightly, with the policymakers committing to a "relatively substantial increase" in local government bonds.

Notably, for the Trump administration, the statement asserted that China has "properly dealt with the Sino-U.S. economic and trade frictions."

"It is necessary to implement the consensus reached by the heads of state of China and the United States in Argentina to advance bilateral economic and trade negotiations," it said in reference to the ninety-day moratorium on further tariff hikes agreed by U.S. President Donald Trump and Chinese President Xi Jinping during their December 1 meeting.

However, while the policymakers stated that "market access should be eased" and the intellectual property rights of foreign firms in China respected, they gave no indication Beijing would abandon its "Made in China 2025" initiative aimed at seizing global leadership in a number of key high-tech industries.
"Losing Steam"
But while Beijing looks to a brighter future, the short-term appears increasingly cloudy.

Official gross domestic product (GDP) data showed the economy slowing for the second straight quarter in the September quarter, cooling to 6.5 percent from 6.7 percent in the prior quarter, marking its slowest expansion since the global financial crisis.

"China's economy is losing steam," Frederic Neumann, co-head of Asian economics research at HSBC Holdings, told Bloomberg News .

"While it's easy to blame the trade tussle with the U.S. for this, the deceleration so far is mostly domestic driven, with infrastructure spending contracting and car sales coming off the boil."

The latest data shows Beijing's full-year growth target of 6.5 percent could be a stretch. Industrial output, fixed investment, retail sales, trade and official manufacturing indices have all slipped, with consumer and producer prices also dropping.

The only bright spot has been construction activity, long a favorite of policymakers given its responsiveness to increased credit.

China's stock market has tanked in 2018, losing around 22 percent over the past year, while the Chinese yuan has dropped nearly 6 percent.

Capital Economics expects next year to be even tougher though, particularly for a communist-ruled regime that bases its legitimacy on economic success.

"China's economic slowdown looks set to deepen next year, weighing on equity prices and the renminbi. Policy stimulus should put a floor beneath growth before the year is out, but won't drive a strong recovery," the London-based consultancy said in a December 17 report.

Capital Economics expects official GDP to cool from 6.9 percent in 2017 to 6.6 percent in 2018. However, its in-house measure of the Chinese economy points to an even sharper contraction, from around 5.5 percent currently to just 4 percent next year.

The consultancy's senior China economist, Julian Evans-Pritchard, suggests that the housing sector will cool, while export growth will come under increased pressure "even if a further escalation in tariffs is avoided."

Even with policy stimulus, Capital Economics sees growth slowing until at least mid-2019, leading to further weakness in China's stock market and currency.

Longer term, the consultancy argues that China's state-led capitalism will see its growth rate slow to just 2 percent by 2030, due to Xi's decision to "double down" on government intervention rather than allowing scope for greater market forces.

Other forecasters also point to a slowdown. The International Monetary Fund (IMF) expects China's GDP growth to weaken from 6.9 percent in 2017 to 6.6 percent this year and 6.2 percent in 2019, putting it well behind fast-rising India's projected 7.4 percent growth.

In its latest staff report , the Washington-based organization pointed to "tensions in the authorities' strategy between, on the one hand, the stated goals of stabilizing leverage, allowing market forces a decisive role, and greater innovation and opening-up, and, on the other, still-unsustainable debt growth, the pervasive role of the state in the economy, and the relatively restrictive trade and investment regime."

Elsewhere, the OECD sees China slowing from 6.6 percent GDP growth this year to 6.3 percent in 2019 and just 6 percent in 2020, amid a weakening world economy.

"Global economic growth remains strong, but has passed its recent peak," the Paris-based organization said in its latest growth forecasts in which it further cut its projections.

ANZ Research also tips a cooling in China, from an estimated 6.6 percent GDP gain this year to 6.3 percent in 2019, along with a rising current account deficit and renewed deflation risks.

Meanwhile, China's debt to GDP level could reach 275 percent by the end of 2019, up from 261 percent in 2018, according to the Bank for International Settlements.

Suggesting China's slowdown is structural, ANZ Research said, "China's labor force continues to contract, and the trend seems irreversible."

Any escalation of the U.S.-China trade war could further damage China's exports, with ANZ Research estimating that $517 billion worth of U.S. tariffs imposed on Chinese goods could trim China's GDP by 0.5 percent.

The recent arrest in Canada of Meng Wanzhou, chief financial officer of Chinese telecommunications giant Huawei, and resulting response by Beijing suggests that a near-term détente between the world's two biggest economies is unlikely.

Trump's trade advisor, Peter Navarro told Japan's it would be "difficult" for a deal to be done within the ninety-day ceasefire, saying "half-measures" would be unacceptable on issues such as China's forced technology transfers, cyber spying, state-directed investment and other barriers.

"China is basically trying to steal the future of Japan, the U.S. and Europe, by going after our technology," he said.

For China, it all adds up to an increasingly difficult outlook for Asia's Year of the Earth Pig, a zodiac sign known for financial fortune. With trouble at home and abroad, Beijing will need plenty of good luck.
Anthony Fensom is an Australia-based freelance writer and consultant with more than a decade of experience in Asia-Pacific financial/media industries.
Image: Reuters.

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Hit by a trade war and a slumping global economy, China is desperately attempting to avert a slowdown in the world's second-biggest economy. Against all the odds, can Beijing pull it off? On December 21, China's leadership signed off on an economic roadmap for 2019 that features aggressive stimulus measures, including tax cuts and monetary easing.

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Focus not only on what's happening in the economy but also the cause of the situation.

Try to use actual data to see if what the news article says actually happened. Then you can also figure out why or why not.

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China decides to rely on ‘larger scale’ tax cuts and home market to weather stormy 2019.

China's government effort to boost household confidence and increase household consumption by cutting taxes.

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China decides to cut taxes on 'larger scale' in 2019

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Amid trade war with the United States, annual Central Economic Work Conference chaired by President Xi Jinping sets policy direction for next year

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The driving force behind the country’s economic miracle over the last 40 years, is struggling amid the Chinese government’s campaign to reduce national debt and the trade war with the United States.

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Can China's leaders restore confidence in private sector?

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China is rolling out a nationwide initiative to help private business owners but some question whether it will be able to take the necessary steps