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China's economy is looking brighter but it's not in the clear yet – CNN

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Hong Kong (CNN Business)From big gains in tech stocks to robust trade data, China has had plenty of good news on the economic front this week.

The positive developments come after the world’s second largest economy was battered by widespread Covid lockdowns, a sweeping crackdown on tech companies and a real estate slump. Consumer spending and factory output both shrank sharply in April, while unemployment has surged to the highest level since the initial coronavirus outbreak in early 2020.
As China takes steps to gradually reopen businesses, and authorities introduce a slew of measures to stimulate activity, there are signs that a revival may be around the corner.
Still, analysts say more needs to be done to repair investor confidence in China, and some big risks haven’t gone away.
“It will take time to repair the business confidence, and sell-offs in Chinese assets might resume if China data proved to be disappointing again,” said Ken Cheung, chief Asian foreign exchange strategist for Mizuho Bank.

Tech rally

China’s economic slowdown has largely been a self-inflicted headache, spurred by President Xi Jinping’s clampdown on private enterprises, a campaign to contain excessive borrowing by real estate developers, and a relentless adherence to zero-Covid policy.
But there are some signs that the regulatory nightmare for tech firms may be coming to an end. Earlier this week, The Wall Street Journal reported that Beijing’s cybersecurity review of Didi was about to wrap up. The move would allow the ride-hailing giant to return to app stores in mainland China, almost a year after Didi was removed over data privacy violations.
Didi’s shares climbed 24% Monday on Wall Street after the report.
Other media reports this week have signaled an easing of the crackdown. On Thursday, Bloomberg said Chinese regulators have started early stage discussions on a potential revival of Ant Group’s IPO, citing people familiar with the matter. Reuters reported on Thursday that Ant owner of the hugely popular Alipay app aims to file a preliminary prospectus for the offering as soon as next month.
Jack Ma was about to make history with a planned $37 billion IPO of the Alibaba affiliate in Shanghai and Hong Kong in November 2020. But China abruptly halted the Ant deal days before the stock was due to start trading, a move that marked the start of a regulatory offensive that engulfed the internet industry in the year that followed.
Ant Group said Thursday that it “currently doesn’t have any plan to initiate an IPO.” The China Securities Regulatory Commission added that it has not conducted any research work regarding a new Ant IPO.
Alibaba (BABA) shares have been whipsawed by the news but are still up 18% this week on Wall Street.
In Hong Kong, meanwhile, the stock has risen for five straight sessions and is up 22% this week — the best weekly performance since Alibaba’s secondary listing there in 2019.
The Chinese government has brought further relief to the tech sector in recent weeks. Regulators have said that they would support overseas listings of tech companies.
And on Tuesday, authorities issued 60 new game licenses following a months-long freeze. Tencent (TCEHY), China’s largest gaming firm, soared more than 6% after the news.
The Hang Seng Tech Index, which tracks the 30 largest Chinese tech stocks in Hong Kong, is up 10% this week.

Trade improves

China also released strong trade data for the month of May, after a slump in April. The country’s exports jumped 16.9% in May from a year ago, compared with only 3.9% growth in April.
Imports, meanwhile, rose for the first time in three months.
“The increase in both exports and imports was mainly due to the reopening of the port of Shanghai, China’s largest port, in the last week of May,” said Iris Pang, chief economist for Greater China at ING Group.
Shanghai had been under a strict lockdown since late March, forcing factories to close and causing significant shipping delays.
Congestion at the Shanghai port is almost “back to normal,” VesselsValue, a shipping data firm, said earlier this week. Average waiting times have now shortened to 28 hours, compared to 66 hours in late April.
On Wednesday, Premier Li Keqiang urged local government officials to help smooth transportation and logistics and protect supply chains. China would strive to achieve reasonable economic growth in the second quarter and reduce unemployment, he said, reiterating previous calls.
Last week, the State Council, the country’s cabinet, unveiled a new package of 33 stimulus measures to shore up growth, including tens of billions of dollars of additional tax cuts and infrastructure spending.

Is this enough?

But analysts remain cautious.
The May trade data does not change “the consensus view that China’s trade surplus is going to narrow,” as demand for Chinese exports weakens because of a slowing global economy, HSBC analysts said Thursday.
Earlier this week, the World Bank warned that stagflation risks are rising in the global economy. It now expects global growth to slump from 5.7% in 2021 to 2.9% in 2022, significantly lower than 4.1% that was anticipated in January. Global inflation, meanwhile, is likely remain above target in many economies, the bank said.
HSBC analysts said that Beijing’s investment push in infrastructure and property is set to increase China’s commodity imports, adding to its inflation problems.
“As commodity prices remain elevated, these imports will be costly for China,” they said.
China’s adherence to a policy of tough Covid restrictions also remains a significant risk.
President Xi Jinping said Wednesday that the country must stick “unswervingly” to its zero-Covid strategy, while urging officials to bolster the economy, according to state-owned Xinhua News Agency.
A growing number of neighborhoods in Shanghai face another temporary lockdown this weekend, as authorities launch mass testing days after Covid restrictions were eased for most of its 25 million residents.
Authorities in Beijing’s largest Chaoyang district also announced Thursday the closure of all entertainment venues, just days after allowing their reopening.
“Markets have naively assumed that China was one and done with Beijing and Shanghai,” said Jeffrey Halley, senior market analyst for Oanda, on Thursday.
“Covid-zero is going nowhere in China, and nor is the virus. Thus, the chances of extended restrictions returning, with the ensuing drop in China’s economic activity, remain as high as ever,” he added.
— CNN’s Beijing bureau contributed to this report.

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Economy

Yellen Sounds Alarm on China ‘Global Domination’ Industrial Push – Bloomberg

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US Treasury Secretary Janet Yellen slammed China’s use of subsidies to give its manufacturers in key new industries a competitive advantage, at the cost of distorting the global economy, and said she plans to press China on the issue in an upcoming visit.

“There is no country in the world that subsidizes its preferred, or priority, industries as heavily as China does,” Yellen said in an interview with MSNBC Wednesday — highlighting “massive” aid to electric-car, battery and solar producers. “China’s desire is to really have global domination of these industries.”

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Opinion: The future economy will suffer if Canada axes the carbon tax – The Globe and Mail

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Open this photo in gallery:

Poilievre holds a press conference regarding his “Axe the Tax” message from the roof a parking garage in St. John’s on Oct.27, 2023.Paul Daly/The Canadian Press

Kevin Yin is a contributing columnist for The Globe and Mail and an economics doctoral student at the University of California, Berkeley.

The carbon tax is the single most effective climate policy that Canada has. But the tax is also an important industrial strategy, one that bets correctly on the growing need for greener energy globally and the fact that upstart Canadian companies must rise to meet these needs.

That is why it is such a shame our leaders are sacrificing it for political gains.

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The fact that carbon taxes address a key market failure in the energy industry – polluters are not incentivized to consider the broader societal costs of their pollution – is so well understood by economists that an undergraduate could explain its merits. Experts agree on the effectiveness of the policy for reducing emissions almost as much as they agree on climate change itself.

It is not just that pollution is bad for us. That a patchwork of policies supporting clean industries is proliferating across the United States, China and the European Union means that Canada needs its own hospitable ecosystem for clean-energy companies to set up shop and eventually compete abroad. The earlier we nurture such industries, the more benefits our energy and adjacent sectors can reap down the line.

But with high fixed costs of entry and non-negligible technological hurdles, domestic clean energy is still at a significant disadvantage relative to fossil fuels.

A nuclear energy company considering a reactor project in Canada, for example, must contend with the fact that the upfront investments are enormous, and they may not pay off for years, while incumbent oil and gas firms benefit from low fixed costs, faster economies of scale and established technology.

The carbon tax cannot address these problems on its own, but it does help level the playing field by encouraging demand and capital to flow toward where we need it most. Comparable policies like green subsidies are also useful, but second-best; they weaken the government’s balance sheet and in certain cases can even make emissions worse.

Unfortunately, these arguments hold little sway for Pierre Poilievre’s Conservatives, who called for a vote of no-confidence on the dubious basis that the carbon tax is driving the cost-of-living crisis. Nor is it of much consequence to provincial leaders, who have fought the federal government hard on implementing the tax.

Not only is this attack a misleading characterization of the tax’s impact, it is also a deeply political gambit. Most expected the vote to fail. Yet by centering the next election on the carbon tax debate, Mr. Poilievre is hedging against the possibility of a new Liberal candidate, one who lacks the Trudeau baggage but still holds the line on the tax.

With the reality of inflation, a housing crisis and a general atmosphere of Trudeau-exhaustion, Mr. Poilievre has plenty of ammunition for an election campaign that does not leave our climate and our clean industries at risk. The temptation to do what is popular is ever-present in politics. Leadership is knowing when not to.

Nor are the Liberals innocent on this front. The Trudeau government deserves credit for pushing the tax through in the first place, and for structuring it as revenue-neutral. But the government’s attempt to woo Atlantic voters with the heating oil exemption has eroded its credibility and opened a vulnerable flank for Conservative attacks.

Thus, Canadian businesses are faced with the possibility of a Conservative government which has promised to eliminate the tax altogether. This kind of uncertainty is a treacherous environment for nascent companies and existing companies on the precipice of investing billions of dollars in clean tech and processes, under the expectation that demand for their fossil fuel counterparts are being kept at bay.

The tax alone is not enough; the government and opposition need to show the private sector that it can be consistent about this new policy regime long enough for these green investments to pay off. Otherwise, innovation in these much-needed technologies will remain stagnant in Canada, and markets for clean energy will be dominated by our more forward-thinking competitors.

A carbon tax is not a panacea for our climate woes, but it is central to any attempt to protect a rapidly warming planet and to develop the right businesses for that future. We can only hope that the next generation of Canadian leaders will have a little more vision.

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Business leaders say housing biggest risk to economy: KPMG survey – BNN Bloomberg

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Business leaders see the housing crisis as the biggest risk to the economy, a new survey from KPMG Canada shows.

It found 94 per cent of respondents agreed that high housing costs and a lack of supply are the top risk, and that housing should be a main focus in the upcoming federal budget. The survey questioned 534 businesses.

Housing issues are forcing businesses to boost pay to better attract talent and budget for higher labour costs, agreed 87 per cent of respondents. 

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“What we’re seeing in the survey is that the businesses are needing to pay more to enable their workers to absorb these higher costs of living,” said Caroline Charest, an economist and Montreal-based partner at KPMG.

The need to pay more not only directly affects business finances, but is also making it harder to tamp down the inflation that is keeping interest rates high, said Charest.

High housing costs and interest rates are straining households that are already struggling under high debt, she said.

“It leaves household balance sheets more vulnerable, in particular, in a period of economic slowdown. So it creates areas of vulnerability in the economy.”

Higher housing costs are themselves a big contributor to inflation, also making it harder to get the measure down to allow for lower rates ahead, she said. 

Businesses have been raising the alarm for some time. 

A report out last year from the Ontario Chamber of Commerce also emphasized how much the housing crisis is affecting how well businesses can attract talent. 

Almost 90 per cent of businesses want to see more public-private collaboration to help solve the crisis, the KPMG survey found.

“How can we work bringing all stakeholders, that being governments, not-for-profit organizations and the community and the private sector together, to find solutions to develop new models to deliver housing,” said Charest.

“That came out pretty strong from our survey of businesses.”

The federal government has been working to roll out more funding supports for other levels of government, and introduced measures like a GST rebate for rental housing construction, but it only has limited direct control on the file. 

Part of the federal funding has been to link funding to measures provinces and municipalities adopt that could help boost supply. 

The vast majority of respondents to the KPMG survey supported tax measures to make housing payments more affordable, such as making mortgage interest tax deductible, but also want to maintain the capital gains tax exemption for a primary residence.

The survey of companies was conducted in February using Sago’s Methodify online research platform. Respondents were business owners or executive-level decision makers.

About a third of the leaders are at companies with revenue over $500 million, about half have revenue between $100 million and $500 million, with the rest below. 

This report by The Canadian Press was first published March 27, 2024.

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