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This month in a nutshell

The economy gets weaker.

Liberalization gets stronger.

The stock market soars higher.

Warnings in the South China Sea gets harsher.

 

Balancing growth and debt remains China’s greatest challenge

As more economic indicators suggest China’s economy continues to decelerate, concern mounts that growth, instead of adjusting to a “new normal,” will fall to an unacceptably low level that will have a serious impact on employment and the ability of China to regain momentum. China implemented another minor stimulatory measure in May, but also took actions that seem to pave the way for much larger fiscal stimulus, should the government decide it is necessary. But is more debt really what China needs? Just as it was at the beginning of 2015, the central question for China’s economy remains how China will balance debt with growth. Prudence has been the theme so far, but that could change.

 

Commitment to Liberalization Looks Strong

On the bright side, in May China took a number of steps, including eliminating price controls, adopting IMF standards relative to balance of payment accounting, and taking steps toward eliminating capital controls, that seem to indicate that China remains committed to free market liberalization, which would be very good news for China’s long-term growth and development.

 

While the above are likely the most important topics in China today, the most notable stories for May relate to two things that are rising unexpectedly—China’s stock market and tensions in the South China Sea.

 

Soaring stock market: Leverage and Liquidity

Despite weakness in China’s economy, its stock market is up roughly 140% over the last 12 months. While there is a good argument to be made that the long-term prospects for China’s economy remain strong, there is an even stronger argument to be made that China’s soaring market has more to do with capital controls, excess liquidity, and increasing leverage in China than the performance of its companies or economy.

 

Tensions in the South China Sea

China began to more aggressively expand its presence in disputed territories of the South China Sea in 2014. There was a pause toward the end of last year but China has increased its activities again. In May, after China took actions including installing military equipment in its outposts, the US began challenging China’s intentions by placing military aircraft and vessels closer to the disputed territories than China wants. Verbal confrontation ensued including both sides asserting they have no intention of backing down. At a security conference in Singapore at the end of the month, both sides struck a more conciliatory tone, giving reason to hope that cooler heads will prevail. The fact remains that the possibility for an escalation in tensions remains strong.

 

Other stories in this week’s newsletter, all coming under our Law & Politics category, are as follows:

Two ways to tackle counterfeit goods

Two leading international luxury brands use different methods to protect their brands in China, both of which put Alibaba in the hot seat.

 

Chinese judges resigning out of frustration

A story by the China Economic Weekly reported that China is having trouble retaining and building its ranks of judges, which doesn’t make it any easier to establish a fair court system.

 

Major arrests relative to stealing technology for China

Two arrests were made relative to Chinese nationals (or former nationals) illegally taking technology from US firms where they worked and selling it to companies in China.