Xi Jinping’s leadership plan won’t dent our resource prospects

China’s shift towards personal rule by Xi Jinping won’t dent the prospects for our resource industry.

Leader for life: Chinese President Xi Jinping

China is agog today with the implications of the country shifting towards personal rule by Xi Jinping, which may be for life if he chooses.

The focus on the country’s economic prospects that usually comes from a meeting of the National People’s Congress or parliament — now almost halfway through its annual session — has thus gone missing. The key NPC vote is scheduled to take place later today to allow Xi to stay in power for life if he wishes.

But China’s economic choices remain no less important for the prosperity of the world at large, including of course Australia — where business have placed many if not most of their eggs in the China growth basket.

The core targets announced by Premier Li Keqiang in his low-key state-of-the-nation address that launched this NPC session, reflect strong confidence in the recent management of the economy, but with some added monetary and fiscal tightening that reflects continued anxiety about China’s tottering debt mountain.

The target for gross domestic product growth in 2018 is “around 6.5 per cent”, a high figure given the maturity of the economy but below last year’s 6.9 per cent, and the base rate needed for the country to achieve one of the chief aims set by the ruling Communist Party, to double GDP during the decade to 2020.

Li anticipates inflation rising this year from 1.6 per cent in 2017 to about 3 per cent, reflecting hopes for more buoyant consumption. He has placed unusual emphasis on employment prospects, perhaps indicating an area of special concern for the government. More than 11 million jobs would be created in 2018, he said, compared with last year’s 13.5 million, and the “registered” unemployment rate — while a somewhat elastic figure in China — would be held below 4.5 per cent. The high headline growth rate, he said, would “enable us to achieve relatively full employment”.

Broad M2 money supply is expected to grow at the same pace as 2017, about 8.2 per cent — sending a signal that the government wishes to curb debt risks and contain asset bubbles.

The ANZ research team says “this reinforces our forecast that China’s overall leverage level will likely peak in 2020, with the debt-to-GDP ratio staying below 260 per cent”.

Reinforcing this aim, the budget deficit is projected to be held to 2.6 per cent of GDP, compared with 3 per cent last year. The central government’s interest payments on debt will reach almost the equivalent of $86 billion in 2018.

Amanda Du, vice president at the investors service section of Moody’s, which has kept a close eye on China’s debt challenge and downgraded the sovereign rating last year as a result, noted that “the direct debt of Chinese regional and local governments (RLGs) is set to increase marginally to 81 per cent of fiscal revenue in 2018 from 74 per cent in 2017, as part of the central government’s ongoing move towards the greater control and transparency of RLG funding sources”. She said Moody’s supports the giant 69 per cent leap in the quota for special purpose RLG bonds because it will provide those governments with much-needed borrowing to meet their capital expenditure needs.

While Moody’s expects that the RLGs will continue to use local government financing vehicles in obtaining funding, financing through these entities will be more regulated and transparent.

The partial shift of responsibility for social welfare spending to the central government will further help the RLGs to increasingly self-finance their capital expenditures, Du said.

It remains crucial, however, to keep an eye — insofar as the genuine figures are available — on the funding vehicles’ broadly defined credit-to-deposit ratios, including especially those of “shadow banking” institutions, as well as on debt-for-equity swaps, which Li said would continue to receive support.

For Australia, a further important element of the NPC announcements is that Beijing intends to keep reducing the capacity of the steel and coal industries — by 30 million and 150 million tonnes respectively this year — even though the campaign has already achieved a core goal of improving the sectors’ profitability. This would bring the total reductions in capacity to 590 million tonnes of coal and 145 million tonnes of steel over three years — driven by both environmental and economic priorities.

During this process, the government has also been forcing the mergers of steel and coal corporations, as it seeks to restructure its state-owned businesses into a few national champions in each sector, many of which are encouraged to “go global”, as Yancoal has done in Australia for instance with its $2 billion investments last year.

It is difficult to predict the implications for key Australian exports, but judging by China’s continued strong appetite for our iron ore and both metallurgical and thermal coal, it seems unlikely to make much of a dent — indeed, it may foster higher demand given the comparative quality of the Australian materials.

Li Xiyong, the executive chairman of Yancoal and of its ultimate owner, one of those “champions”, told The Australian recently that he was confident that while the proportion of coal in the overall energy mix would fall from the present 60 per cent, while other sources, including renewables, would grow, the total consumption of coal would remain steady for about 20 years.

He emphasised: “A revolution is under way in China to change the way coal is used — not a revolution to kill coal itself.”

Australia’s prospects for continued massive sales of liquefied natural gas into China have also been boosted with He Lifeng, the director of the National Development and Reform Commission — the government’s top planning agency — saying that the country would sign more international contracts to ensure the increased supply of LNG, which is planned to take a bigger share of the base generation load.

The “reform” paradigm that has ruled China analysis for decades no longer retains its currency, as Xi’s priorities have moved on, including to projecting China’s aims, opportunities and even values globally.

But important changes are still being flagged, including the incredibly challenging prospect of introducing property taxes — which China lacks — legislation for which Premier Li said the government would “steadily push forward”.

And the global context remains, as Li said, one in which “the policy changes of the major economies” (read the US) “and their spillover effects create uncertainty”.

On cue, as the NPC session got under way, Donald Trump pronounced ominously: “Trade wars are good, and easy to win.”