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China and Brazil: A new start for the next five years

Author: NIU Yuanhao

The Chinese Communist Party (CCP) held the 19th national congress in late October. Chinese president Xi Jinping declared a “new era” for the nation. The meeting laid down the development agenda for the next five years. The new strategy from the government has important implications to the international community for China’s growing influence in the world.

 

China: Quality Over Quantity

China downplays the nominal growth target.  Five years ago, the 18th national party congress set the goal to double the real gross domestic product (GDP) from its 2010 level by 2020. Economists have long doubted the nominal target since it does not accommodate any potential external shocks to the economy. In order to deliver the promised goal, the government might be forced to embark on unnecessary suboptimal expansionary monetary and fiscal policy that leads to excessive debt inside the economy. Standard & Poor downgraded China’s sovereign credit rating from A+ to AA- in late September due to concerns over credit growth. However, the well-known target didn’t appear in the speech of President Xi. While the growth target is still guiding the administration, it is unlikely to be the on the priority list. Not setting the target removes the constraint to the local government and gives them more flexibility to push for structural reform agenda.

A campaign for poverty alleviation was launched by President Xi. He pledged to lift all the rural residents above the poverty line by 2020. The current Chinese poverty line is roughly two US dollars per day, slightly above 1.9 dollars standard set by the world bank. The majority of the poor people live in the countryside and villages where can be hardly reached by the rapid economic growth on the urban side. Reducing inequality has received great attention from the leadership. In the past five years, the Chinese government has lifted at least 65 million people out of poverty. Government is making unprecedented efforts in this direction. The rural areas expect to receive large funding for projects ranging from agriculture development to health care subsidy.

The government also re-affirms their commitment to green development. Sustainable development will be China’s new model of modernization.  In the past several years, a series of environmental pollutions has stirred public anger. More regulations against pollution emission were made by the government in response to the public request. The environment protection agency was restrained from enforcing pollution control because higher environment standard would increase the cost of the firm and slow down the economy. Local government usually use that as an excuse to not cooperate with the agency. However, the agency is now empowered by the central government. Over 6,000 local officials were punished for environmental malpractices in 2016.

Green energy and other eco-friendly practices are encouraged by the government. Considering the government’s influence on the state-own corporations, they are more likely to adopt energy efficient technology and improve the environmental standards in their operations. More importantly, the improvement in the domestic operations will have positive spillovers to the international operations of Chinses multi-national firms. When they are subject to a higher standard in China, their practices abroad are likely to be improved as well.

 

Brazil: Approaching the light at the end of the tunnel

The Brazilian economy is about to get out of the worst recession in a century. The most recent forecast from IMF projects a 1.7 percent growth for Brazil in 2018, comparing with just 0.2 percent growth prediction for the year of 2017. The key policy rate is expected to be cut further by the central bank of Brazil at the end of the year. The economy is likely to come back to a growth trajectory in not-too-distant future though the 2018 presidential election will complicate the situation. Mounting political uncertainty for future leadership will eventually put damper on the economy.

A primary concern is the record-high unemployment and rising inequality in Brazil. More than 20 million poor people were lifted out of poverty from 2004 to 2014. High commodity prices and favorable economic condition fueled the government’s budget and supported a large social welfare system. With the spending cap now, the coverage and benefits of the social programs are more constrained. This exacerbates the adverse condition after losing the job. Millions of Brazilians fell back to below the national poverty line of around 45 US dollars per month.

 

Promoting International Trade and Investment

Facing the potential reverse of globalization in major developed countries, Chinese government endorsed free trade and globalization. One belt one road initiative officially entered the party constitution. This demonstrates China’s commitment to the initiative and will have a long-lasting impact on the firms. More policy support is expected in the future.  Currently, the Asian Infrastructure Investment Bank, the Silk Road Fund, and other major policy banks are financing the projects. Funding from the private sector has not been involved deeply in the initiative. Many investment projects towards the emerging markets are not well planned and regulated. As the size of outflow capital grows, this naturally raises the concern of money laundering. Increased level of regulatory measures has already been reported. In the future, there will be more incentives for ambitious Chinese firms to extend their business abroad within the One Belt One Road Initiative. With growing number of firms participating overseas investment, the previous ad-hoc regulation might also be replaced with more institutionalized regulation.

In addition to encouraging domestic firms to invest abroad, One Belt One Road Initiatives also welcomes foreign investment into China, especially those that contribute to innovation or sustainable development. On October 25th, China issued its first sovereign dollar bonds since 2004. The 2 billion 10-year bond offer is relatively moderate and received demand more than 10 times the offer. The final price is 25 basis points above the US Treasuries, which demonstrated the global investors’ confidence. The bond will also provide a benchmark for other financial assets in China.

The government of Brazil also opens up its domestic market to global investors. President Temer has a comprehensive plan for privatization and reducing the size of the inefficient private sector.

In August, 57 public companies and airport terminals are announced to be privatized. The potentially inflows in infrastructure is more than able to offset the reduction in public investment in the long run. An auction took place in September to sell drilling rights of offshore oil fields to world oil giants. The state-owned China National Offshore Oil Corporation successfully obtained several fields. The privatization hopefully will raise enough tax revenue to the government and boost the efficiency of the Brazilian economy.

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