ETTIENNE LE ROUX: SA can’t bank on China
Hopes that a significant stimulus in China could lift SA from its growth slump are unrealistic. Better to zero in on challenges closer to home
Some may think SA has less to worry about, now that China is again pump-priming its economy. The logic here is that it should be only a matter of time before a likely rebound in Chinese GDP growth boosts import demand, and props up real economic activity in SA.
Unfortunately, those expectations are unrealistic.
Eager as policymakers are to help turn China’s business cycle around, it won’t be easy. The fact is, Chinese legislators lack the leeway to loosen policy — at least to the extent they did in the past two economic downturns.
For more than a decade, China’s economy has benefited from the boom in debt-fuelled fixed investment, egged on by huge monetary and fiscal policy expansion in 2008 and 2015.
But as significant as the gains in jobs and wealth creation have been for the average Chinese citizen, it’s only now that the unintended consequences of this spending binge are beginning to bite.
Corporate China is a case in point. Chinese companies are burdened with about $10-trillion of outstanding debt (multiples of a few years ago), and they are having to service this debt with profits under pressure from the worst economic downswing since 2008.
At the same time, corporate default rates are rising, which creates systemic financial stability risks for the central bank, the People’s Bank of China (PBOC).
And it shows. While full-on monetary loosening was the norm during the previous two downturns, it now seems the PBOC has become more selective.
So, now you see it combining liquidity injections into the financial system with lower reserve requirements for banks in good health, while also tightening credit controls for other less fortunate banks battling with higher nonperforming loans.
It’s also telling that it’s the first time the PBOC hasn’t cut its benchmark lending rates this far into a downswing.
But it seems the finance ministry is also keenly focused on China’s debt-related vulnerability — a focus made all the sharper because the public sector is an even bigger debtor than the corporate sector.
In his budget on March 5, Premier Li Keqiang even pledged to slow the growth in government spending from 9% in 2018 to 6.5% this year. And while the government provided tax relief last year and promised to beef this up in 2019, the overall fiscal stimulus planned for the year ahead falls short of what it was in 2015. Back then, the "broader" budget deficit rose by about 3 percentage points of GDP. The projected increase in 2018/2019 is half as much.
We had better save ourselves by pushing ahead with much-needed structural reforms
No sticking to stimulus script
Opting for a more measured policy response all-round is wise.
Given China’s rising government debt and the worsening structural imbalances (like a heavily geared corporate sector, and a property sector exhibiting high or rising vacancies), it no longer justifies authorities following the playbook of doing whatever it takes.
So, those hoping for China to bail out SA should take heed: forget about China sticking to the stimulus script. Here’s a more likely outcome: the policy response in 2018/2019 is underwhelming (relative to previous downswings) and any resurgence in growth is less robust as a result. This means the economic tailwind for SA exporters to China will likewise be weaker.
This should focus our minds: SA’s salvation won’t come from abroad, so we had better save ourselves by pushing ahead with much-needed structural reforms. A start has been made with rebuilding institutions, but more is needed.
Indeed, forcefully easing immigration policies, cutting red tape, promoting greater competition in state-controlled markets, reskilling municipalities and improving the quality of education must be part of the mix. This is where we’d like to put our expectations, not in a country 11,230km away.
• Le Roux is chief economist at Rand Merchant Bank