Opinion 

Year of the dog: Xi seeks a smoother path ahead

Craig Farley

Craig Farley

As China celebrates entering the year of the dog, the Chinese leadership has shown its loyalty to improving the country’s economy. 

At the end of 2017, the 19th National Congress of the Communist Party of China became the backdrop to a reaffirmation of President Xi Jinping’s political strength.

But, crucially, it also provided the platform for the Party to refresh its ‘roadmap’ for China in the years ahead.

The roadmap shows that the party’s leadership is committed to improving the living standards of the Chinese people. However, this is no longer a ‘growth at any cost’ agenda.

Communist Party language refers to a 'new era', focussing on higher quality, sustainable development.

This infers more tolerance for a slower growth profile from now on and has been made possible by the strength of the Chinese consumer and supply side initiatives that have positively surprised China watchers.

The government’s delicate balancing act involves managing a controlled slowdown in the economy, while preventing a policy overreach that could destabilise the financial system. 

The roadmap contains three core pillars that should put the country on a more sustainable economic trajectory.

Supply-side reform has focused on consolidation, removing excess capacity and reducing production volumes in key industries such as coal and steel. In these polluting industries, production is being cut further through the winter months in order to improve air quality, particularly in northern China.

These cuts are benefitting the largest operators in these markets, improving profit margins as excess capacity is taken offline.

Meanwhile, the government is also focusing on deleveraging the more financially stressed areas of the economy - for example, the replacement quota model, which allows weaker and more inefficient producers to sell their capacity to larger operators, could be rolled out more aggressively.

This is particularly positive for the materials sector, which is enjoying a sweet spot of an improving supply dynamic, strong pricing power and underlying policy support. Improved cash flows are enabling leveraged companies to repair balance sheets and restore debt to asset ratios to more appropriate levels.

This will have knock on benefits for the country’s major banks, as they have significant loan volumes allocated to this sector.

The third pillar of the roadmap is the ‘beautiful China’ programme, which was written into the party’s constitution at the 19th Congress.

The programme enforces the country’s environmental laws and regulations, incorporating pollution targets and related measures into provincial government KPIs for the first time.

In particular, the recent introduction of a pollutant tax at the local level should significantly increase local government revenues, while further driving consolidation among materials and energy producers.

Acknowledging the spectre of risk that looms from China's growth model of the past three decades, Beijing is taking necessary steps in the context of the current political system to engineer a smoother, more sustainable growth path for the country in the years ahead, with the aim of improving living standards for the Chinese population.

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