22 January 2019
Retail figures will get more attention as China marches toward a consumption-led economy. Photo: Bloomberg
Retail figures will get more attention as China marches toward a consumption-led economy. Photo: Bloomberg

Ten things to watch in Year of the Horse — Part two

Yuan trend

It seems only a matter of time before the renminbi breaks the 1:6 barrier against the US dollar. If it continues to appreciate, even if very slowly, this will happen in just a few months.

Last year, the yuan rose 3 percent, a remarkable rise considering that the Chinese economy slowed and its trade surplus and capital inflows were not as big as they used to be. This showed policymakers will leverage renminbi appreciation to restructure the economy and propel reform.

China has to maintain the momentum toward globalization of the currency. It is clear that the yuan’s popularity in overseas markets stems from its rising value, not convenience or international status, so strengthening the yuan is the only option to push it onto the world stage.

This year, with China’s trade and foreign exchange surplus expected to hold up, the yuan will have to rise. But a capital outflow triggered by tapering of monetary policy in the United States and concerns about the competitiveness of exporters and manufacturers may prompt policymakers to reconsider the pace of yuan appreciation.

In this sense, the direction of the yuan and how fast it will move will reflect which way Chinese decision makers are leaning — a faster-growing yuan for proactive restructuring and internationalization or a slow-paced yuan to secure economic and industrial growth.

Shadow banking/property

China’s shadow banking industry grew by leaps and bounds last year with the help of an emerging internet finance market. Money raised through online channels by internet companies mainly went to fund companies. This means a lot of money has flowed from bank deposits to fund managers and invested in shadow banking.

As non-bank lenders often invest their money in the property market and local government debt, risks in shadow banking are increasing.
To make sure local government debt, dubbed by some as a ticking bomb, does not turn into a financial crisis, policymakers will not do anything to burst the property bubble.

They know that the property market has hijacked the overall financial system, so the only way out is to gradually reduce the heavy dependence on the property market. But before that can happen, a collapse of the property market must be avoided.

But this does not mean they will tolerate booms in the property market and and local government debt. Policymakers will try to keep a lid on them but not knock them down. It is a delicate balancing act.

Last year, there have been a few defaults on trust fund products but mainly small ones. China Credit Trust recently averted default on a high-yield trust product, showing trust funds can withstand a certain level of loss.

The defaults have raised an alarm. More major shadow-bank defaults loom and it would not be a surprise if one or two local governments run out of money this year.

Foreign investment

The focus for China has clearly changed. It’s now outbound more than inbound investment. It is increasingly backing homegrown companies instead of wooing foreign investment.

Last year was a difficult one for some foreign companies as the government stepped up antitrust investigations and other forms of economic scrutiny. Costs have quickly reduced their competitiveness.

The outward exodus of foreign companies has been pronounced in recent years but the Chinese have not been overly concerned about the situation, showing China is more selective when it comes to foreign investment.

Now that the country has become skillful at using antitrust to scrutinize foreign investors, it remains to be seen whether the same kind of sophistication and determination can be used to dismantle state monopolies.


Among all economic indicators, inventory is one of the few that is constantly overlooked but it is very useful in gauging whether the Chinese economy is growing solidly. Inventory figures can help avoid cheating on gross domestic product (GDP) numbers.

Based on inventory figures, last year’s growth recovery, for instance, was not a really solid one.

GDP had picked up since July but inventory continued to hover near lows. The ratio of inventory of finished industrial products to GDP was at a low since 2008. Raw material and product inventory indices were below the contract-growth mark.

These showed recovery in the second half was led by one-off government stimulus, not by real consumption, so industries were not confident to add to their inventory.

Retail and catering

Consumption is the ultimate driving force of any economy. As China works to become a consumption-led economy, retail and catering figures will get more attention.

Last year, both sectors performed poorly, with slowing growth. Retail sales grew just 13 percent while revenue from catering rose 9 percent.

But the good thing is that government spending played a smaller role in the growth as a state-mandated frugality campaign curbed official spending on big-ticket items, luxury goods and high-end dining.

If retail and catering continues to post low double-digit growth this year while the anti-extravagance campaign continues, it would not be altogether a pessimistic scenario.

Another thing to watch is how online retail can be better reflected in the statistics. With more shoppers turning to the internet, online retail sales need to be accounted for in order to depict the correct picture. These are estimated to be 10 percent of all retail sales.

– Contact the writer at [email protected]



The writer is an economic commentator. He writes mostly on business issues in Greater China.

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