China favors debt to slower growth (for now)

Economy: China takes action to stimulate the economy, indicating that, as it tries to balance growth and debt in 2015, in the short term it is willing to take on more debt to try to get a bit more growth. Also related to the economy, indications are that credit stress in China is delaying commercial payments and China’s capital account went into deficit in Q4 2014, another sign that China’s economy is in transition.

 

Economic Liberalization: We may have moved a step closer to a trade war over IT equipment as China announced new rules that limit the ability of US firms to compete in China, just the latest in the growing flap over cyber espionage, IT equipment, and control of the internet. On a more positive note China lifted some capital controls in the Shanghai FTZ and announced a plan to overhaul its foreign investment regulations that should make it easier for foreign companies to invest in China.

 

Law & Politics: The tightening of internet access in China continued even as signs mount that the restrictions may impact business in a significant way. China launched two new “Circuit Courts” which are intended to make legal proceeds independent of local influence and corruption.

 

Other News: China is building installations in the South China Sea that could lead to further tensions with its neighbors.

 

Below are the headlines and main points from this month’s newsletter.

 

Economy

 

 

China cuts rates in response to sluggish economic indicators

Signs of a slowing economy (PMI, trade, inflation, home prices) plus decelerating credit growth prompts China to lower interest rates and reserve requirements for banks to support growth. Actual impact on growth and debt difficult to forecast at this point.

 

Capital account deficit and FDI reflect transition in China’s economy

China’s capital account slid into a deficit in 2014, in part because direct investment to Europe and the US were strong. Foreign investment into China’s healthcare sector is also rising significantly. All are signs of China transitioning to its “new normal”

Chinese companies are delaying payment longer

A survey shows that past due payments have increased in China, no doubt reflecting the slowing economy.

Liberalization

 

Trade battle looms as cyber espionage row intensifies

New rules from China frustrate America and increase the chances of a serious trade skirmish over IT equipment. Plus, more allegations of spying on both sides.

Changes coming to foreign investment regs and FTZ capital controls

China announced it is planning to overhaul the present foreign investment law and companies in the Shanghai FTZ will have the ability to raise capital offshore—two small but helpful indications of continued liberalization.

Law & Politics

 

Internet clampdown continues as does resistance to it

While China hands down a new rule for monitoring internet usage, Europe expresses its dissatisfaction with the new restrictions and VPN service providers continue to work around them. The battle continues….

Lack of “grease” slows decision-making

Corruption crackdown makes government officials reluctant to make decisions which might, in the end, slow the economy.

New circuit courts could be a step in the right direction for the rule of law

China initiates operations of new circuit courts with the goal of promoting judicial independence and the rule of law. Time will tell if the courts are part of a new path in China or just the same old thing.

Other News

 

China continues to expand its presence in the South China Sea

Despite diplomatic efforts to decrease tensions at the end of 2014, new satellite images show that China is continuing to build installations in the South China Sea demonstrating that China has not changed its position or intentions in the region.

Drug crime on the rise in China

A crystal meth ring in Guangdong and a recent crackdown on drug use that resulted in 60,000 arrests indicate that, along with growing affluence, China has a growing drug problem.