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Here's how China became the world's No. 2 economy and how it plans on being No. 1 – CNBC

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China’s President Xi Jinping raises his glass and proposes a toast at the end of his speech during the welcome banquet for leaders attending the Belt and Road Forum at the Great Hall of the People in Beijing on April 26, 2019.

Nicholas Asfouri | AFP | Getty Images

China is on the cusp of keeping a big promise — a vow to double its GDP and income in a decade and take the country to the forefront of the global economic power structure.

The nation now faces the challenge of keeping the momentum going in the face of mounting challenges.

The ascension began in the late 1970s with a move to more open markets. It continued through aggressive central planning, utilizing the advantages of cheap labor, a devalued currency and a robust factory system to spread its products around the world.

All of that changed the economy from slumbering rural decay to a prospering diverse superpower. The country now seems on a inexorable path to No. 1.

China has climbed to No. 2 in the world, with a GDP of $13.1 trillion that, while still trailing the U.S., keeps getting closer. Forecasters expect that growth just north of 6% in 2020 will get to the stated goal of doubling the economy from 2011-20.

On the other hand, China also is a country that appears to be taking the worst of the trade war with the U.S. and faces myriad other challenges to keep up to torrid pace of growth.

The future awaits, then, however complicated.

“Going forward, China is going to continue to be very competitive,” said Michael Yoshikami, founder of Destination Wealth Management. “China is still going to be a global player. But it’s a matter of managing expectations relative to what you think is going to happen.”

Soldiers wait for a container ship to berth at Qingdao Port on March 8, 2018 in Qingdao, China.

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Indeed, a nation with growth that would be the envy of virtually anywhere else in the world is seeing, in relative terms at least, a significant slowdown. Growth peaked at 14.2% in 2007 but has declined to below 7% annually each year since 2015, according to World Bank figures.

‘Tariffs are hurting’

Yoshikami’s firm is based in San Francisco, but he does significant investing business with China and travels there frequently.

What he sees is a nation leading the way in education and technological innovation but suffering under the weight of U.S. tariffs on Chinese imports, as well as the rising cost of labor and slowing manufacturing.

“The Chinese economy is targeted to grow at 7%. It was growing at 14%. If it grows at 6%, that’s still a lot, but you’re going to see a lot of negative sentiment,” Yoshikami said. “If you talk to people in China, the average person is not as optimistic as they were two years ago or four years ago or six years ago.”

One big negative has been the trade war.

While the two sides appear on their way to a small-scale phase-one agreement on tariffs, much is left to be done, and the ramifications are being felt through the Chinese economy.

A truck moves a shipping container at Qingdao Port on January 14, 2019 in Qingdao, Shandong Province of China.

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“The average person believes that the trade tariffs are hurting,” Yoshikami said. “Inflation is up. The cost of basic foodstuffs has gone up 10% to 15%. The cost of pork has gone up 100%. So you literally have people changing their diet because they simply can’t afford the product anymore.”

“It’s hurt them a lot,” he added. “The U.S. would certainty welcome a deal. But China really needs a deal.”

On one hand, Yoshikami sees rapid and widespread advancements that allow consumers to buy goods on apps like AliExpress that provide cheap products at no shipping charges. Consumers line up for Levi Strauss jeans and other products as they still covet American goods as symbols of U.S. economic hegemony.

But there’s an overhang.

Taking stock of tariffs

The trade war damage to the economy is palpable and measurable.

Fiscal revenue growth has fallen to 3.8% in 2019 from 6.2% a year ago as the rise in tax receipts has been barely positive after increasing 8.3% in 2018, according to Nomura Global Economics, citing data through October. In addition, export growth declined 0.3% through November after rising 9.9% for the same period a year ago, due to the collapse of U.S. exports, which declined 12.5% in 2019 compared to 2018 growth of 8.5%.

That export slowdown itself took 1.3 percentage points off China’s GDP this year, according to Nomura.

“We have been leading the call on a growth slowdown since mid-2018, and we wish to maintain this lead by calling the recovery,” the Tokyo-based research firm said in a lengthy year-ahead look at China. “Unfortunately, we have to reiterate that the [worst] is not yet over and 2020 looks set to be yet another tough year.”

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Among the obstacles Nomura sees for China are a slowing real estate sector, less room for stimulus, particularly the credit easing that fueled a growth spurt in 2016-17, and continued issues with leverage.

“Amid worsening growth prospects, Beijing needs to do more to bolster growth,” Nomura economist Ting Lu and others wrote. “However, we recommend caution on the speed, scope and efficiency of Beijing’s stimulus measures, due to surging debt, including foreign debt, a much lower return on capital, the smaller current account surplus and falling FX reserves.”

The upside

Wall Street, though, thinks the issues in 2020 could be a turning point.

Looking further out on the timeline, there are plenty of reasons to expect that China’s drive toward No. 1 will have strong tailwinds, which will be propelled by amplifying what pushed the country’s growth over the past decade.

There’s a multi-faceted bull case for China that starts with the emergence of multiple “supercities.”

As the transition takes place, some 23 of these supercities will have populations greater than New York and five alone will combine to house 120 million people, according to projections by Morgan Stanley.

By bringing workers from the countrysides into the massive population centers, the supercities are aimed at arresting the drag that an aging population is putting on the broader Chinese economy

“We believe the answer to these challenges is a new phase of urbanization with the potential to create productivity gains by facilitating the freer movement of enterprises and workers while generating synergies between diverse industries,” Morgan Stanley economists said in a report.

Room for investing

China also is investing heavily in 5G technology as part of the modernization and urbanization efforts. The purpose is to get houses connected so that they are heavily automated, while students can use virtual reality learning to help with everything from online tutoring to homework.

As an investable situation, Morgan Stanley advises clients to look to technological infrastructure, the Internet of Things and software as one theme; digitalization of old-economy industries as another, and the supercities trends as a third, looking at smart appliances and vocational education among other innovations.

J.P. Morgan Chase advises clients to watch for a bottoming in industrial investment and cyclical trends and for improving momentum as 2020 progresses. The firm recommends a switch from defensives to cyclicals, in particular real estate, industrials and health care.

Goldman Sachs sees opportunity as well in pro-cyclical parts of the market as well as 5G-focused tech strategies and some leading consumer stocks.

But for Yoshikami, the Destination Wealth Management investor, the picture is still a bit cloudy as some of the more immediate issues remain largely unresolved.

“Investing in China is a dangerous game, because they are in between being an emerging market and a developed market,” he said. “I’m not sure the valuation is worth it at this point.”

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Russia ministry says economic slump less severe than feared – Al Jazeera English

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Economy ministry says gross domestic product to shrink 4.2 percent this year amid sanctions over the war in Ukraine.

Russia’s economy will contract less than expected and inflation will not be as high as projected three months ago, economy ministry forecasts showed, suggesting the economy is dealing with sanctions better than initially feared.

The economy is plunging into recession after Moscow sent its armed forces into Ukraine on February 24, triggering sweeping Western curbs on its energy and financial sectors, including a freeze of Russian reserves held abroad, and prompting scores of Western companies to leave.

Yet nearly six months since Russia started what it calls a “special military operation”, the downturn is proving to be less severe than the economy ministry predicted in mid-May.

The Russian gross domestic product (GDP) will shrink 4.2 percent this year, and real disposable incomes will fall 2.8 percent compared with 7.8 percent and 6.8 percent declines, respectively, seen three months ago.

At one point, the ministry warned the economy was on track to shrink by more than 12 percent, in what would be the most significant drop in economic output since the fall of the Soviet Union and a resulting crisis in the mid-1990s.

The ministry now sees 2022 year-end inflation at 13.4 percent and unemployment of 4.8 percent compared with earlier forecasts of 17.5 percent and 6.7 percent, respectively.

GDP forecasts for 2023 are more pessimistic, though, with a 2.7 percent contraction compared with the previous estimate of 0.7 percent. This is in line with the central bank’s view that the economic downturn will continue for longer than previously thought.

The economy ministry left out forecasts for prices for oil, Russia’s key export, in the August data set and offered no reasons for the revision of its forecasts.

The forecasts are due to be reviewed by the government’s budget committee and then by the government itself.

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China’s premier urges pro-growth policies as economy sputters – Al Jazeera English

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Li Keqiang calls on provinces to bolster growth after consumption and output fall short of expectations.

China’s Premier Li Keqiang asked local officials from six key provinces that account for about 40% of the country’s economy to bolster pro-growth measures after data for July showed consumption and output grew slower than expectations due to Covid lockdowns and the ongoing property slump.

Li told officials at a meeting to take the lead in helping boost consumption and offer more fiscal support via government bond issuance for investments, state television CCTV reported Tuesday evening. He also vowed to “reasonably” step up policy support to stabilize employment, prices and ensure economic growth.

“Only when the main entities of the market are stable can the economy and employment be stable,” Li was cited as saying at the meeting in a front-page report carried in the People’s Daily, the flagship newspaper of the Communist Party.

The meeting came after Monday’s surprise interest-rate cut did little to allay concern over the property and Covid Zero-led slowdown. Economists have warned of even weaker growth and have called for additional stimulus, such as further cuts in policy rates and bank reserve ratios and more fiscal spending.

Li acknowledged the greater-than-expected downward pressure from Covid lockdowns in the second quarter and asked the local officials to strike a balance between Covid control measures and the need to lift the economy. “Only by development shall we solve all problems,” Li said, according to the broadcaster.

Indicating China may resort to more local debt issuance to pump-prime the economy, Li said “the balance of local special bonds has not reached the debt limit” and the country should “activate the debt limit space according to law,” according to the People’s Daily report.

Based on the government budget, local authorities may be able to issue an estimated 1.5 trillion yuan ($221 billion) of extra debt and bonds this year to support infrastructure spending, after top leaders urged better use of the existing debt ceiling limit in a key July Politburo meeting. The arrangement could be approved in August, according to some analysts.

China’s 10-year government yield rose for the first time this week, up one basis point to 2.64% from the lowest in more than two years.

Li urged local governments to accelerate the construction of projects with sound fundamentals in the third quarter to drive investment, the report said, and also asked officials to expand domestic consumption of big-ticket items such as automobiles and support housing demand.

He also stressed the importance of opening up the domestic market to foreign investors, noting that the six major provinces — Guangdong, Jiangsu, Zhejiang, Henan, Sichuan and Shandong — account for nearly 60% of the country’s total foreign trade and foreign investment.

“Opening up is the only way to make full use of the two markets and resources and improve international competitiveness,” Li was cited as saying.

Li’s appearance suggests state leaders have completed their annual two-week policy retreat in resort area of Beidaihe.

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German recession fears deepen as economy is hit by 'perfect storm' – Financial Times

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Investors are now more pessimistic about the German economy than they have been at any time since the eurozone debt crisis more than a decade ago, worrying that a sharp fall in Russian natural gas supplies and soaring energy prices will plunge the country into recession.

The ZEW Institute’s gauge of investor expectations about Europe’s largest economy has sunk to its lowest level since 2011, dropping from minus 53.8 to minus 55.3, underlining the deepening gloom about the economic fallout from Russia’s invasion of Ukraine.

The think-tank’s survey of financial market participants provides an early indicator of economic sentiment after Russia reopened the Nord Stream 1 pipeline following a maintenance break last month, but kept the main conduit for delivery of gas to Europe operating at only a fifth of capacity.

Economists have slashed their estimates for growth in Germany and the wider eurozone this year, while raising their inflation forecasts and warning that an end to Russian energy supplies would force Berlin to ration gas supplies for heavy industrial users.

On Tuesday, German baseload power for delivery next year, the benchmark European price, rose over 5 per cent to a record €502 per megawatt hour, according to the European Energy Exchange. This is six times higher than the price a year ago — driven upwards by the sharply higher cost of gas used to generate electricity and the prolonged European heatwave that has disrupted generating capacity.

The surging price of energy has driven up the cost of imports for Germany and other eurozone countries, sending the bloc’s trade deficit up to €24.6bn in June, compared with a surplus of €17.2bn for the same month a year earlier, according to data from Eurostat, the European Commission’s statistics bureau. The value of exports from the bloc rose 20.1 per cent in June from a year ago, but imports were up 43.5 per cent.

Line chart of Visible trade balance (€bn) showing Energy costs have moved the eurozone's trade balance from surplus into deficit

“The still high increase in consumer prices and the expected additional costs for heating and electricity are currently having a particularly negative impact on the prospects for the consumer-related sectors of the economy,” said Michael Schröder, a researcher at the ZEW.

He said investor sentiment also worsened due to an expected tightening of financing conditions after the European Central Bank raised its deposit rate by 0.5 percentage points to zero in response to record levels of eurozone inflation.

Carsten Brzeski, head of macro research at Dutch bank ING, said the German economy was “quickly approaching a perfect storm” caused by “high inflation, possible energy supply disruptions, and ongoing supply frictions”. 

A heatwave and dry spell has reduced water levels on the Rhine below the level at which barges can be loaded fully, restricting important supplies for factories, which Brzeski estimated was likely to knock as much as 0.5 percentage points off German growth this year.

Adding to the gloom, German households will have to pay hundreds of euros more in fuel bills this winter after the government unveiled an extra gas levy of 2.419 cents per KWH from October. This is expected to push up the cost for a family of four by €240 in the final three months of the year.

Germany’s top network regulator told the Financial Times this month that the country must cut its gas use by a fifth to avoid a crippling shortage this winter. The economy ministry has also ordered all companies and local authorities to reduce the minimum room temperature in their workspaces to 19C over the winter.

The country has achieved its target of filling gas storage facilities to three-quarters of capacity two weeks ahead of schedule, after high prices and fuel saving measures led to reduced use. But there are worries its objective to lift gas storage to a 95 per cent target of capacity by November will be more challenging if Russia keeps throttling supplies.

The German economy stagnated in the second quarter, the weakest performance of the major eurozone countries. Last month, the IMF slashed its forecast for German growth next year by 1.9 percentage points to 0.8 per cent, the biggest downgrade of any country.

Additional reporting by Harry Dempsey

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