China’s Chance to Rein in its Surplus — or Double Down

FILE PHOTO: Electric cars of Zeekr, a premium brand owned by Chinese automaker Geely, are on display at the Frank-Auto dealership in Moscow, Russia June 14, 2024. REUTERS/Yulia Morozova/File Photo
FILE PHOTO: Electric cars of Zeekr, a premium brand owned by Chinese automaker Geely, are on display at the Frank-Auto dealership in Moscow, Russia June 14, 2024. REUTERS/Yulia Morozova/File Photo
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China’s Chance to Rein in its Surplus — or Double Down

FILE PHOTO: Electric cars of Zeekr, a premium brand owned by Chinese automaker Geely, are on display at the Frank-Auto dealership in Moscow, Russia June 14, 2024. REUTERS/Yulia Morozova/File Photo
FILE PHOTO: Electric cars of Zeekr, a premium brand owned by Chinese automaker Geely, are on display at the Frank-Auto dealership in Moscow, Russia June 14, 2024. REUTERS/Yulia Morozova/File Photo

Two clashing narratives have emerged over China’s heady manufacturing expansion led by electric vehicles, renewable energy and high-tech goods. One says it’s benefiting from comparative advantages, including a giant workforce and domestic market. Another says Beijing’s surging exports are a byproduct of distorting policies that threaten the rest of the world.

Regardless of which is right, Chinese President Xi Jinping and his leadership team have an opportunity next week to either double down on their claim China’s manufacturing prowess is a reflection of normal competition, or tilt toward accommodating economic concerns in foreign capitals from Washington to Brussels, Bloomberg reported on Saturday.

The so-called Third Plenum gathering of the Chinese Communist Party, culminating with an expected readout after the confab concludes July 18, takes place against a backdrop of deepening angst over Chinese industrial growth that notably exceeds the nation’s domestic demand. The objections were on full display in a detailed speech this week by the US Treasury’s top international official, Undersecretary for International Affairs Jay Shambaugh.

Failure to embrace new steps to bolster domestic spending and reduce reliance on exports would put China at increasing risk of trade protectionism—regardless of whether US President Joe Biden wins in November, or if Donald Trump—who launched a trade war against China—prevails.

Data out on Friday offered a fresh reminder of the imbalance between China’s productive capacity and its domestic demand, with its monthly trade surplus hitting an all-time high of $99 billion in June.

China’s leadership and its supporters insist that this commercial prowess is thanks to pure economics. Premier Li Qiang last month put it down to the country’s skill in science and technology, and building “a broad stage for enterprises to pursue innovation and upgrade their products.”

Years of investment in STEM (science, technology, engineering and mathematics) subjects and churning out engineers has bolstered research and development, strengthening China’s advantage, says Zhao Zhongxiu, president of the University of International Business and Economics in Beijing.

The improved quality and reduced cost of Chinese-made goods appeal to consumers around the world, and it’s not a question of subsidies but the fruit of organic industrial development, he argued in a recent Bloomberg Television interview. “China’s industry has benefited from this comparative advantage.”

But that’s not how Shambaugh sees it. In a speech this week before the Council on Foreign Relations, he cited analysis from the Center for Strategic and International Studies showing that China spends 5% of its GDP on industrial subsidies—a share that’s ten times bigger than that of the US. It also dwarfs subsidies by Germany, Japan and fellow emerging market Brazil.

“In sectors like semiconductors, steel and aluminum, China alone accounts for between 80% and 90% of global subsidies provided to those industries,” Shambaugh said.

That’s contributed to China racking up a manufacturing-goods trade surplus that’s approaching 2% of world GDP, or roughly twice the share of the famous Japanese surplus in the early 1990s that roiled US-Japan relations, according to data cited by Shambaugh.

The Treasury undersecretary ran through figures illustrating falling rates of capacity utilization and rising numbers of unprofitable companies, all suggesting overcapacity. In areas including the solar energy sector, Chinese firms themselves have expressed concerns about a supply glut.

“Emerging patterns suggest the size of subsidies in China is only increasing, especially at local and provincial levels,” he also said.

That observation puts a premium on the policy signals that Xi and his lieutenants send out at the Third Plenum, which will chart the over-arching course for the next five years.



Japan’s Economy Rebounds Strongly on Consumption Boost, Backs Case for More Rate Hikes

 People look at the city's skyline from the Bunkyo Civic Center Observation Deck in Tokyo on August 14, 2024. (AFP)
People look at the city's skyline from the Bunkyo Civic Center Observation Deck in Tokyo on August 14, 2024. (AFP)
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Japan’s Economy Rebounds Strongly on Consumption Boost, Backs Case for More Rate Hikes

 People look at the city's skyline from the Bunkyo Civic Center Observation Deck in Tokyo on August 14, 2024. (AFP)
People look at the city's skyline from the Bunkyo Civic Center Observation Deck in Tokyo on August 14, 2024. (AFP)

Japan's economy expanded by a much faster-than-expected annualized 3.1% in the second quarter, rebounding from a slump at the start of the year thanks to a strong rise in consumption and backing the case for another near-term interest rate hike.

The Bank of Japan had forecast that a solid economic recovery will help inflation sustainably hit its 2% target, and justify raising interest rates further after it hiked them last month in its continued quest to exit years of massive monetary stimulus.

The increase in gross domestic product (GDP) compared with a median market forecast for a 2.1% gain, and followed an upwardly revised 2.3% contraction in the first quarter, government data showed on Thursday. The reading translates into a quarterly rise of 0.8%, beating a 0.5% increase expected by economists in the Reuters' poll.

"The results are simply positive overall, with signs for a pick-up in private consumption backed by real wage growth," said Kazutaka Maeda, an economist at Meiji Yasuda Research Institute.

"It supports the BOJ's view and bodes well for further rate hikes, although the central bank would remain cautious as the last rate increase had caused a sharp spike in the yen."

Private consumption, which accounts for more than half of the economic output, rose 1.0%, compared with forecast for a 0.5% increase and the first gain in five quarters.

Private consumption has been a soft spot in the economy, which has stuttered over the past year as households struggle with rising living costs, blamed in part on higher import prices due to the weak yen.

POST-KISHIDA CHALLENGE

Public discontent over rising living costs was one of the factors that prompted Japan's Prime Minister Fumio Kishida to announce he would resign next month.

Kishida's replacement could call a snap election in the fall if the approval rating is high, said Kengo Tanahashi, economist at Nomura Securities, adding that the BOJ is unlikely to opt for an additional rate hike during that period.

"We believe that the BOJ will raise interest rates one more time in October or December, but the possibility of a rate hike in October has decreased considerably in light of Prime Minister Kishida's decision not to run for office," Tanahashi said.

The government expects the economy will continue to recover gradually as the spring wage talks were strong this year and the minimum income will be raised in October, economy minister Yoshitaka Shindo said in a statement.

Striking a note of caution, Shindo said Japan must pay close attention to economic-downturn risks overseas and market volatility, as investor concerns grow of a possible US recession that sparked last week's rout in global financial markets.

The Nikkei share average finished the morning trading up 1.01%, mainly buoyed by Wall Street's gains overnight, while the Japanese yen was little changed around 147.38 to the dollar after the data.

CONSUMPTION RECOVERY

An influx of tourism has also helped boost retail sales in Japan. Fast Retailing, owner of clothing brand Uniqlo, highlighted strength of the domestic market in its most recent earnings, lifted by a surge in duty-free sales.

Spending by tourists is expected to reach 8 trillion yen ($54.74 billion) this year, according to the government, which sees tourism as an important growth driver in an economy long hobbled by an ageing population.

Capital spending, a key driver of private demand-led growth, rose 0.9% in the second quarter, matching a median market forecast in a Reuters poll. Business investment might come under pressure in the months ahead as exporters face global demand pressure.

External demand, or exports minus imports, knocked 0.1 point off growth, the data showed.

The BOJ raised interest rates last month and detailed a plan to taper its huge bond buying in another step toward phasing out its massive monetary stimulus.

Japan is a global outlier in raising rates as most major central banks, including the US Federal Reserve, have begun to ease policy or are moving in that direction.

The first rise in consumption in more than a year "should encourage the Bank of Japan to press ahead with another rate hike later this year," said Marcel Thieliant, head of Asia-Pacific at Capital Economics.