In a note to investors communicating insights from a conference trip to Beijing, Nikko Asset Management chief strategist Naoki Kamiyama said that while China looked “set for lower economic growth this year”, it would be for the sake of “creating a cleaner, more efficient economy”.
“The consensus among many government officials and private sector economists at the conference was that China will experience a somewhat lower growth rate in 2018,” Mr Kamiyama wrote.
“This reflects the Chinese government’s desire to meaningfully improve the national quality of life by carefully applying the growth brakes.”
He said that deceleration would come in the form of “somewhat higher interest rates”, the axing of infrastructure projects that “may not be necessary” and redirecting investments into coal and steel towards more sustainable options.
But an outstanding challenge would be a shift in “the relationships between central and local governments to further eliminate structural corruption and translate national goals into effective action”.
“For example, the central government has traditionally presented local governments with growth targets but without providing ideas or wherewithal to get things done,” Mr Kamiyama wrote.
“Strapped for funds and having limited tax bases, too many local governments have turned to the shadow banking system, exposing them to conflicts of interest and potential corruption.”
The Chinese central government would make moves to involve itself more in the process of setting and implementing local-level policies, as well as drive further reform in the areas of underperforming small bank loans and shadow banking.
Mr Kamiyama also indicated that the government was pushing to address environmental issues, naming the “prime” environmental issues as air, water and soil pollution.
“In a panel discussion on the environment, panellists noted that a factor in environmental improvements has been central government successes in reducing overcapacity in coal and steel, which has pushed up prices for these commodities, forcing businesses to consume them more efficiently,” the chief strategist wrote.
“The central government’s message to companies is that the quality of the environment does matter, and profligate pollution is no longer tolerated.”
