China-led SCO, a counterweight to the West

China’s retail sales growth trailed expectations, the pace of industrial output expansion slowed and a drop in investment worsened as its economy struggled to regain pace at the start of the second half of the year.July retail sales rose by 0.6 per cent, missing the 1.3 per cent expectation among economists polled by financial data provider Wind, and slowing from June’s 1 per cent rate. industrial output rose by 4.5 per cent, trailing the 4.9 per cent forecast and June’s 5.3 per cent pace, China’s statistics agency said.A fixed-asset investment slump deepened, with the pace of decline accelerating to 6.7 per cent in the first seven months of the year from 6.1 per cent in the first half. investment" class="entity-link entity-topic" data-entity-id="187703" data-entity-type="topic">real-estate investment in the first seven months fell by 19.2 per cent from a year earlier. The slowdown may boost calls for policymakers to reverse course on stimulus measures, after a Politburo meeting last month did little to suggest that new steps were on the way to get growth back on target.The statistics bureau pointed to a “complicated and volatile” external environment and weak domestic demand in its data release. Bad weather was a drag. Shenzhen, for instance, suffered its wettest July in 31 years, which hit traffic at the southern city’s restaurants and other businesses.The July economic data was released at 3pm rather than in the usual morning slot. The delay coincided with a ceremony marking the centenary of the birth of late Chinese president Jiang Zemin. President Xi Jinping spoke at the event.Related news: China’s new-home prices fell by 0.2 per cent in July versus June, extending three years of declines, according to the statistics bureau. Prices for existing homes dropped by 0.3 per cent, based on data from 70 Chinese cities. Luxury-home sales in top-tier cities have bucked the broader slump as the tech boom bolsters demand at the high end of the market. Sales of newly built homes priced from 30 million yuan to 50 million yuan (US$4.5 million to US$7.4 million) rose by 38 per cent in the first half of the year, to 1,636, according to Purui Digital Intelligence Technology. New lending to Chinese borrowers fell by a record amount last month amid weakening confidence and a long-term shift towards less capital-intensive industries. Real-economy borrowers repaid a net 590 billion yuan of local-currency loans in July, the most since the central bank started releasing the data in 2002. Overall lending, which also includes borrowing between financial institutions, dropped by a net 340 billion yuan, more than triple the decline expected by economists, according to Bloomberg News. Some smaller Chinese cities have surpassed Tier 1 cities in per capita consumer spending, boosting efforts to spur domestic consumption. Five counties in eastern Zhejiang province, for instance, saw more spending per person among urban residents than Beijing and Shanghai last year, according to data from local authorities. Smaller cities benefit from lower household debt and living costs, as well as improving access to retail goods, said Peng Peng, executive chairman of the Guangdong Society of Reform. How others reported it Rate cut looms: Zhang Zhiwei, chief economist at Pinpoint Asset Management[, said]: “The weak economic data indicate that the economy faces further downside risks that require more effective policy response. The Politburo meeting in late July promised stronger fiscal spending but the implementation and transmission likely takes time. I think the data release today raises the chance of an interest-rate cut by the PBOC.” (Bloomberg) Can’t last: Imbalances do not last forever … China’s steadfast reliance on the producer model is not just a test of the character of its economy. It is a test of the future for the global economy. The country is demanding far too much of a world fixated on cheap consumer goods. Ever-mounting imbalances brought the US and the world economy to its knees during the great financial crisis of 2008-09. It could do the same for China. How long can it last? Not much longer. (Stephen Roach in Financial Times) Not preferred model: Though China recently released its first five-year plan targeting consumption, some economists say Beijing’s policies don’t go far enough. They aren’t taking steps to boost consumption because “that’s not the model they want”, said Alicia García-Herrero, chief economist for Asia-Pacific at Natixis. Beijing wants “to move up the ladder fast and dominate technologies. For that, the fact that people consume and go to the cinema doesn’t really help.” (The Wall Street Journal) Worn safety net: The main obstacle [to a consumption-driven model] is political. Ordinary Chinese save so much because government-backed pensions, health insurance, education funds and basic incomes are woefully inadequate. Absent a safety net, Chinese maintain precautionary savings. Bolstering consumer spending would mean, first, transferring wealth from the state sector and government-backed producers to individuals. Any totalitarian government would be loath to do that because it could pose a threat to its power. (Washington Post, editorial) Boxed in: “The collapse of the country’s prime growth engine – property – has boxed Xi into a corner. He will have to choose between sustaining his industrial ambitions and fixing underlying weaknesses in the economy through big structural changes,” [said Andrew Collier, a Harvard Kennedy School scholar]. (The Hill) The SCMP Plus takeawayThe next global economic crisis could be made in China.That’s the title of a provocative article by former US trade representative Michael Froman in the latest edition of Foreign Affairs. It’s also a worrying thought for leaders around the world, especially with China’s latest monthly economic data showing further signs of strain.Froman’s focus is on China’s overcapacity, a recurring theme among economists and the driver behind a trade surplus that hit US$1.2 trillion last year. The surplus this year could be similar, as yet more export growth has offset the drag from increased oil prices.Booming exports have driven China’s economic expansion for years, masking weak domestic consumption. The issue now, argues Froman, is that such growth is starting to reach the end of the road, and the fallout may be felt internationally.“When the Chinese export machine stalls, the reckoning will be most painful for China,” Froman says. “But a material slowdown in its economy would send shock waves around the world, especially among China’s major trading partners.”The two key threats to Chinese exports are protectionism and simple mathematics, says Froman, who is now president of the Council on Foreign Relations.Foreign nations may erect more trade barriers because worries about China’s threat to domestic industries are increasingly outweighing the benefits of low-cost goods. That’s clearly evident in Europe, where even Germany – traditionally a free-trade advocate – is starting to favour trade defences as a flood of Chinese cars, machinery and chemicals hammers local companies.More importantly, China’s export opportunities may be nearing a limit, Froman says. When its economy was small, shipments could expand at two or three times the pace of overall global growth because there was sufficient international demand to absorb them. Now that China is a large economy, that may no longer be the case.The automotive sector provides a clear example. China has the capacity to build about 25 million electric vehicles and plug-in hybrids per year, which is more than double domestic demand of 12 million and bigger than global sales that may only reach 23 million this year, Froman says. Still, China is building yet more car plants at a pace that exceeds global demand.“At some point, there may simply be no more buyers for all of China’s cars,” Froman says.The threat to the global economy is that if exports plateau, there is little else that can fuel China’s growth, he says. Property is in a sustained slump, infrastructure cannot sustain more needless high-speed railways, manufacturing already surpasses domestic demand, and services remain thin because of low household spending. New industries, such as commercial aircraft or artificial intelligence, aren’t going to help much either, Froman says.Stimulus efforts may also be less effective than in 2008 because there is no longer support from demographic tailwinds. Mass internal migration to cities has cooled and the country’s working-age population is shrinking rather than growing. That could leave China facing a Japan-style lost decade, with the added challenges of a relatively poorer economy, worse demographics and weaker institutional infrastructure, Froman argues.A China slowdown would spread overseas because reduced appetite for raw materials would hit global prices, hurting major commodity exporters such as Australia, Brazil and Chile, along with sub-Saharan Africa. China could also retrench overseas capital, leading to a sovereign debt crisis across the Global South. The country is by far the biggest creditor to the developing world.Froman’s recipe for avoiding a crisis is a coordinated global effort to help China rebalance its economy, and gradual appreciation of the yuan to cool its exports and boost imports. There’s also a call for China to lower subsidies for priority sectors, ease internal migration and improve the social safety net.China is likely to bristle at what it sees as more unfounded criticism of industrial subsidies and overcapacity – the Commerce Ministry did so in a position paper released last month, crediting innovation and reform for its strong industrial output.The country can also make the case that it is already targeting a “notable increase” in household consumption as a share of the economy in its new five-year plan, which runs until 2030. That plan also calls for reforming household registrations and refining the social security system to make it more sustainable.The need for such reforms has long been discussed overseas, and to an extent within China. It’s increasingly time for talk to turn into action, Froman writes.“Whereas in decades past it was a smart choice, now it is a necessity,” he says.