Strategies & Analysis
by Dan Watson
Contributing Writer
Before you can begin to dissect, ana- lyze and comprehend the status of the Chinese coating market you
first should deal with the 800-lb. gorilla in
the room, namely the Chinese Economy.
We have watched the Chinese economy
explode with annual GDP growth in the
double-digit arena over the past two decades to where China surpassed the U.S.
in 2014 to become the largest world
economy by producing over $17.6 trillion in terms of goods and services. Just
14 years earlier the U.S. produced nearly
three times as much as the Chinese. At
the end of the day, China accounts for
approximately 16. 5 percent of the global
economy versus the U.S. with 16. 3 percent. However, it is important to note
that although China’s economy may be
the world’s largest, it’s still not the richest.
GDP per head is still less than a quarter
of U.S. levels. In recent years the Chinese
have attempted to change the nature of
their economy to depend less on exports
and more on internal consumption. In so
doing we have seen the growth rate decline from those double-digit numbers
down to what the U.S. would consider
great ( 6. 7 percent - 6. 9 percent).
Most economist feel that China is
expected to keep its deep pockets open
to both protect and boost its economy.
China has done this before with positive results. However, if they choose this
method now it will cost them (i.e. fiscal
deficit will surpass budgeted target).
This year (2017) the Communist
Party of China’s (CPC) will hold its 19th
Party Congress in the autumn, making it
one of the key political events to watch.
Conventional wisdom would suggest
that due to this important gathering that
the government will provide the most
dangerous part of the economy — mas-
— with enough cash to continue pow-
ering through the year and that it will
support banks so they can support the
corporate sector and the country’s gross-
domestic-product growth. In other words,
things will stay stable. Move along, noth-
ing to see here. The problem with this line
of thought is it seems as if that’s not the
stability the Chinese government really
cares about. When Donald Trump was
running for President his platform was
built solid on the foundation of provid-
ing employment (i.e., JOBS). Believe it or
not, this is the top priority of President
Xi Jinping, but for very different reasons.
An increase in unemployment often leads
to social unrest. For Xi, things are look-
ing fairly good, at least at this time of
the year. Overall, net hiring looks good
in China, as 43 percent of firms hired,
up from 30 percent this time last year. In
2016 the government was still infusing
the economy with a lot of cash.
Reportedly, earlier this year Xi told a
group of Communist Party members of
the economic and finance group not to
worry if they didn’t hit their target of 6. 5
percent GDP growth (down from 6. 7 percent). In fact, it was reported that he told
them not to try to hit it if doing so would
create too much risk.
Essentially Xi is not scared of a slowdown in the economy, he’s more scared of
the unrest that unemployment and a full-blown debt crisis could bring. Although
this might soothe the nerves of party
members it sent shivers up the spines of
investors who are worried about growth
but based on Xi’s comments can’t be sure
the government will help them along. If
Xi follows through with his comments it
means that’s some companies may very
well be losers. If you recall, there were 55
corporations that declared bankruptcy in
2016, up from 24 in 2015. Xi would most
likely want to see less of this happening
as we close out 2017.
As Xi moves forward with his eco-
nomic reforms and desire for greater
economic stability, he will have to con-
front a possible imbalance between
China’s strengths and weaknesses (Fig
1).
Enter the real world, “North
Korea.” As much as Xi wants “stability”
it seems that fate is destined to interfere
with that objective. The ongoing conflict between North Korea (who gets 90
percent of their goods from China) and
the U.S. has reached a boiling point with
North Korea’s detonating a hydrogen
bomb and threatening to proceed with
additional missile testing. The frustration and tension of this situation resulted in President Donald Trump Tweeting
this past Sunday (September 03) that the
U.S. is considering cutting off trade with
any country that maintains economic
ties with North Korea. The remark was
China - Changing Landscape & Priorities
CHINA PERCEIVED STRENGTHS
• Strong FX reserves and external sur-
pluses
• Large domestic market
• Huge industrial base
• Solid growth prospects
• Low public and external debt
•Improvement in macro-prudential
management
CHINA PERCEIVED WEAKNESSES
• Ageing population
• Difficult business environment, lack
of transparency
• High corporate debt
• High inequality, low share of private
consumption to GDP regarding the
economic performance
• Competitiveness erosion
• Key sectors with overcapacities es-
pecially steel and solar
•Continued geopolitical tensions
with key countries in the region
• Increasing market orientation
Figure 1
