2020, China Demystified.

Hello 2020!

No doubt a turbulent year ahead, I've summarized my top 5 Chinese political economic variables to contemplate, all possibly leading to a profound change in China and China's relationship with the rest of the world.

1. GDP growth guided below 6%, for 2020 and beyond

Two state-backed think tanks in Beijing have eluded to 2020 GDP growth target between 5.5-6%. One leading economist who serves as the advisor to Chinese Premier, Gao Shanwen, made the call in November that China had entered the decade of below 5% GDP on average.

“The three horses" of China's economic growth have all slowed down in 2019, some significantly. As of November 2019,

• CONSUMPTION grew 4.9%, 1/3 of previous period;
• FIXED ASSET INVESTMENT grew 5.2%, 20% of high growth period.
• TRADE grew 2.1%, 10% of previous high growth period.

With the three components added together, we get the bulk of China's GDP growth scenario.

China has continued to call for structural economic upgrade from an investment-led growth model to a consumption-driven growth model. It is within expectation that trade and fixed asset investment growth will slow down due to structural economic factors. What's most concerning is the slow down in consumption growth. Consumption growth already represented 78% of China's GDP growth in 2018.

On a per capita basis, China is expected to cross the $10,000 mark-a major income landmark-in 2019.

There are currently 400 million middle income class in China. By 2035, the number is expected to double to 800 million, according to China's leading economist Li DaoKui. In order to drive sustainable consumption in China, China needs to deliver structural reforms in its healthcare, social welfare and pension systems, so that the burgeoning middle income class can afford to save less, and spend more.

2. What's in store in China's 2020 economic "contingency plan".

In the annual Central Economic Work Conference report formulating economic priorities for 2020, China has emphasized the necessity to be ready for a "contingency plan" for 2020. This contingency plan would in no way be framed on the basis of a liberal market model, in the event that the "China Model" failed to deliver.

In China's current economic thinking under the leadership of President Xi Jinping, China has become more rooted in its economic principles with socialist characteristics.

Mergers between China's largest private and state companies in a mixed-ownership structure will continue in 2020 and beyond. In 2019, SASAC called for joint ventures between China's Alibaba, Tencent, and the largest state infrastructure and telecom players, to help the state sector upgrade its technological competitiveness as it expands across the Belt and Road region.

Admist liquidity shortage, 41 listed Chinese private companies “sold” company control to the State and public funds in 2019. The total market cap concerns 220 Billion RMB ($31.5 billion). State companies' bailout of liquidity-strained private companies, which turns listed private companies into a mixed-ownership structure will continue in 2020.

"State-owned sectors must maintain a dominant role in the Chinese economy". This became the clear guiding principle at the fourth plenum of the 19th party congress in October. State-owned companies must become bigger, better and stronger, echoed by China’s chief trade negotiator Liu He. 

The "contingency plan" would be a plan to proactively drive China's economic independence from the US, and prepare for an increasing economic decoupling with the US, in technology, investment, capital market, currency, beyond trade.

This contingency plan does not point towards more market liberalism, rather more state control.

3. China's overarching economic objective for 2020 is internal stability. 

“Stability” appeared 30 times in China’s Annual Central Economic Work Conference report. areas of stability include employment, finance, trade, FDI, investment, and growth expectations.

Stability in employment is first and foremost, due to its significant political and social implications. US-China trade war has direct impacts to China's labor market, as multinationals and manufactures have begun moving to alternative locations outside of China. China is recalibrating its global supply chain routes, primarily focusing on its Belt and Road region and the EU to compensate for the loss of trade, and trade-related jobs.

In 2020's macro policy setting, China will continue to maintain proactive fiscal policy and prudent monetary policy. However, the policy language has shifted from economic deleverage over the past few years to maintaining stability in the financial leverage. This monetary policy stance opens the room for further monetary easing as necessary, while maintaining the overall prudent stance. No further deleverage breathes some sign of hope to the credit-strained real estate and financial sectors.

2019 saw unprecedented credit defaults from China's state-owned companies and commercial banks. This broke the long-held notion that state sector and critical economic sectors are credit-guaranteed by the state.

“Houses are for living in, not for investment”. This guiding principle from President Xi for China's booming real estate sector, will continue in 2020. However, in the Central Economic Work Conference Report, it emphasized policies to prevent the real estate sector both from overheating and overcooling. The policy stance has again moved from former price cooling to maintaining pricing stability.

4. China's revamped technological landscape and ambitions

A three-year plan was devised to remove all foreign computers and operating systems from all China’s state sectors by 2022. A $29B state-backed fund was created to supercharge China’s chip industry independence. 

Chips and operating systems' independence is seen essential for China's economic security and national security. More state-backed initiatives will supercharge China's technological innovation in such areas.

On November 1, China has formally launched commercial 5G networks across major cities. Huawei has started research and development in 6G technologies.

In 2019, China announced the P2P sector, its once vibrant alternative financing medium, completely gone in two years.

What's fast emerging is China's neobanking sector, internet banks without any physical retail location. This effort is currently led by Tencent's Webank and Alibaba Ant Financial's Mybank. The central government's expectations are to encourage China's major tech companies with large amounts of consumer data to enter and compete in the neobank arena. Currently the list possibly includes China's tech unicorns Bytedance (parent company of Tiktok) and Meituan Dianping ( food and service delivery application), and Xiaomi ( smart phone company).

China's neobanks are leading the world in fintech innovations, under the 3-1-0 business model:

• 3 minutes to apply and reach a loan decision;
• 1 second to release the loan;
• 0 human intervention.

What's more exciting in fintech innovation is China's expected launch of its digital currency, the DC/EP, in 2020. Cyrpto Law was formally implemented in China as of January 1, 2020, to pave the way for the first major digital currency debut in the world.

China has long concerned about its capital outflows. China's capital account is neither free flow, nor freely convertible. The digital currency, using blockchain features of traceability and authentication, will enable the Chinese Central Bank to effectively monitor and control capital flow, particularly capital outflow. This allows China to further internationalize the RMB as a trade, investment and reserve currency across the Belt and Road region, particular as a medium of exchange.

5. Huawei's Strategic success lies with Europe.

Huawei currently has contractual relationships with 172 countries in the world. Of the 195 legitimate sovereign nations as recognized by the UN, Huawei has swept through the developing world. Top strategic priority for Huawei will be the Trans-Atlantic West in 2020. 

The difficulty for Huawei's access of the EU 5G infrastructure is not an issue of an outright ban, different from the US. The issue is with regulations. While none of UK, France, Germany, Belgium, Norway, or Canada, among others, has overtly banned Huawei, the regulatory approval process is increasingly leaning to keep Huawei outside of the 5G networks.

At the NATO Summit celebrating its 70 years anniversary in December, President Trump effectively dropped the 5G Iron Curtain on China. Huawei has become the symbol of divide between China and the West. Whether Huawei's push through Europe can succeed will be a fundamental test of not only China's technological power in owning global tech standards for the first time in Post-Industrial world, but a real test of the solidarity of TransAtlantic democratic West.