Everything That Matters This Week Is Happening In China

China lifting weight strong manReutersChina’s Zhou Lulu sets a new world record in the women’s over 75kg clean and jerk weightlifting competition at the Moonlight Festival Garden during the 17th Asian Games in Incheon September 26, 2014.

In terms of international politics and economics, everything that matters is happening in China this week.


Lets talk about politics first. The two-day Asia-Pacific Economic Cooperation Summit has been going on since Sunday, and President Obama also heads to the region this week.

Already the Summit has made news. Russia and China signed a key energy pact meant to reduce Russia’s reliance on European oil and gas demand, and there is word that Chinese President Xi Jinping may have a word with his Japanese counterpart on the sidelines. This is a big deal as the two leaders haven’t spoken face to face in two years and just signed a four part pact to cool tensions over disputed islands in the East China Sea.

During the opening session of APEC, President Xi made a speech about China’s “new normal.” For the business leaders in the room that meant two distinct things.

First, it was a nod to China’s changing business landscape. Chinese regulators have been cracking down on multi-national corporations operating in the country. Companies like GlaxoSmithKline, Daimler, Qualcomm Chrysler and more have been pushed to cut prices and punished with big fines.

Surveys by business organisations like the American Chamber of Commerce in Beijing and the U.S.-China Business Council show that foreign business people are increasingly concerned that they are becoming the targets of anti-monopoly campaigns — that the government is strong arming them. In one survey 60% respondents said that they felt foreign business is less welcome in China than it was before.

Xi’s speech was also an acknowledgment that China’s economy is slowing down. In part, he said in his speech, because it needs to be reconstructed into a more stable system.

“Resilience best equips the Chinese economy against risks,” said Xi. “Given the strategies and policy options at our disposal, we have the confidence and capability to cope with potential risks.”

That, of course, means getting all the multi-nationals to fall in line with this program (thus the crack down with Chinese characteristics) — one in which the country’s growth may be lower but is more reliant on domestic consumption than foreign investment. As state news agency Xinhua said, the “good old days” are over.

The Economic Data

This is where things get messy — that’s another thing to watch for this week. A slew of data on the health of the Chinese economy — industrial production, foreign investment, retail sales — and the scope of the slow down is coming out (or has come out already).

Xi seems ok with the idea that the country will miss its 7.5% GDP growth target for 2014 — but how much is he comfortable with?

This weekend’s data release showed that imports and exports both slowed — exports slowed less than expected, imports slowed more. Xi would have liked those two stats reversed. He wants his people consuming things, which makes the next two data points all the more troubling.

China girl in front of mini white house Reuterswoman stands next to a miniature replica of the U.S. White House at a theme park called ‘Window Of The World’ in Shenzhen, Guangdong province, October 20, 2014.

China’s consumer price index and producer price index deflated to 6-year lows, coming in at 1.6% and -2.2.% respectively. It’s the low PPI number that is most troubling. It means that already cash strapped, debt laden Chinese companies will continue to suffer from thin margins.

“[The]…data confirmed sluggish domestic demand and rising disinflationary risks. We expect continued PPI deflation through 2015 and the government’s latest “going out” efforts to support Asian infrastructure investment offer some solution to the domestic overcapacity issue,” Barclays wrote in an analyst note.

That “support” came in the form of a minuscule stimulus — a $US113 billion infrastructure project. That’s a little more than 1% of China’s GDP to put it in perspective.

So it’s nothing, and according to Societe Generale’s Wei Yao, even more of that kind of support isn’t the answer anyway.

“China’s debt problem lies with the corporate sector, and so PPI deflation can cause more damage to debt dynamics than CPI deflation. The cure should be capacity consolidation and debt restructuring, rather than

another stimulus package targeted to boost investment demand,” she wrote in a recent note.

In other words, the hard work hasn’t been done yet. Until it’s done, China’s at risk.

To top all that off, China’s Singles’ Day, the biggest shopping day of the year anywhere in the world, is on Tuesday.

So we’ll see how good China’s young single adults are to themselves — it could mean a lot for everyone.

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