Telling China's fortune in the year of the horse

In business, finance and the economy, ten major trends will define China’s performance this lunar year.

Graph for Telling China's fortune in the year of the horse

Performers do the horse dance on the eve of the Lunar New Year, or Spring Festival, at a park fair in Beijing, China, 30 January 2014. The Year of the Horse, according to the symbol of the 12 year cycle of animals, began last night. (AAP)

The Year of Horse will be a testing time for China’s leaders as they confront tough economic conditions, worsening environmental challenges and increasing tension within the region. Here is my prediction for the ten major trends to look out for this lunar year.

Year zero for reform

The bold reform package unveiled by the ruling Chinese Communist Party (CCP) at the third Plenum of 18th Party Congress late last year has been greeted with cautious optimism at home and abroad. This optimism will be put to test this year as China faces tough economic conditions.

Maintaining stable economic growth and implementing painful structural reforms are a set of irreconcilable goals in the short term. It is likely that the leadership will err on the side of caution but reform progress will be faster and deeper than under the lost decade of the Hu-Wen administration.

GDPism in retreat

GDPism has replaced Communism as the country’s official economic ideology over the past few decades. There are encouraging signs that officials’ once unflinching faith in it is slowly fading. The party’s KPI matrix is changing to reflect new priorities such as the environment and debt management.

Eighteen provinces in China have lowered their GDP growth targets, reflecting both tough conditions ahead as well as new policy imperatives. But old habits die hard – don’t expect these addicts to wean off the cocaine overnight.

Clampdown on dissent

Though the party is committed to economic liberalization, political reform is not on the agenda. A prominent citizen activist has just been sentenced to four years in gaol for advocating for the educational rights of the marginalized in society.

The party is maintaining a tight grip over China’s ever-increasing army of smart-phone wielding internet users. But these social media savvy citizens will put pressure on officials and hold them to account.

War on Corruption

More than a dozen minister-level senior officials were arrested in the later part of last year including a general who had in his possession a gold statue of Mao. Wang Qishan, the anti-graft tsar is spreading fear among the country’s 24 million officials.

That’s good news for sharks (who can keep their fins) and bad news for Louis Vuitton.

Zhou Yongkang may become the first former member of the standing member of the politburo – the most powerful political body in China – to stand trial. However, the recent revelation that senior party leaders have been stashing cash in offshore tax havens shows how deeply entrenched the problem is.

Managing the debt bomb

China just dodged its first high-profile potential default in the shadow-banking sector this year, which I called China’s Bear Stearns moment (China’s Bear Stearns Moment, 29 January).

More than half of local government debts are due this year. Beijing can choose to roll them over and continue the musical chairs or allow selective defaults to happen. Once again the money is on Beijing taking a cautious approach which does not bode well for the future.

The rise of Chinese corporate giants

When Alibaba gets the official nod to be listed this year, it will become the world’s third largest Internet company behind Google and Amazon. Tencent, which is worth US$100 billion, is bringing its widely popular WeChat app to the US through a partnership with Google.

Lenovo, the world’s largest PC maker, is moving aggressively into the handset market by acquiring Motorola and a chunk of IBM. Huawei is likely to overtake Ericsson this year to become the world’s largest vendor of telecommunication gears.

More than one third of the Boston Consulting Group’s top 100 global challengers to Western incumbent industry leaders are Chinese companies. Welcome to the age of the Chinese corporate titans.

Worsening tensions in the region

China is likely to continue its hardline approach to territorial disputes with Japan, Vietnam and the Philippines while facing pressure from nationalists at home. An ever increasing number of naval vessels patrolling in these dangerous waters make armed conflict a real possibility.

It is unfortunate that three of East Asia’s most important countries – China, Japan and Korea – all have nationalists running their governments, leaving little room for compromise. Expect a mini-arms race. American and Russian death merchants will have a bumper year peddling fear.

Addressing excess capacity

Senior Chinese officials have promised to serve up their own heads if they fail to address the excess capacity issue, which is closely linked to China’s environment problem.

They are still relying on the old Soviet tactic of using draconian administrative controls such as ordering people to close down factories to reduce capacity. It will be effective up to a point. But the key is still to let the market decide. This was after all the overriding theme of China’s reform package, and the Chinese Academy of Social Sciences’ special taskforce on excess capacity tells the same story.

Environmental challenges

China’s fragile environment has been under enormous pressure from years of reckless growth. Concepts such as a “green GDP” is starting to gain traction.

Beijing is taking this challenge more seriously but the scale of problem does not lend itself to an easy solution. In the past few years, Chinese citizens have taken to the streets to vent their anger and NIMBY movements have been tolerated up to a point.

Chinese overseas investment

This issue has replaced trade disputes and currency manipulation as the number one issue confronting China’s economic partners.

Regulators around the world from Australia to Namibia have to deal with the rising tide of Chinese investment. There is a real danger of rising protectionism in the name of national security.

My prediction is that Chinese investors will face greater scrutiny and a popular backlash. Foreign companies in China and especially American technology companies like Cisco, which have already been damaged by the Snowden revelations can expect similar treatment.  

Follow Peter Cai on Twitter: @peteryuancai

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