Summer-bound tendencies start in May

HomeNewsSummer-bound tendencies start in May

China’s share in 2016 global growth is 33.2%

At the spring press conference in Beijing, the official Chinese representative, Wang Guoqing, observed that given the current weak recovery of the global economy, the growth of the Chinese economy in 2016 was 6.7%. This measure has the PRC surpass the world’s major economies.

The economic growth of 6.7% counts as the lowest for China since 1991. Will there be a further weakening of the Chinese economy? What are the intrinsic driving forces of this market? What is the likelihood of medium or high-growth rates to be maintained in 2017? These issues became the focal points for the attendants and permanent members of the Chinese ’two sessions’ committees this year.

Compared to the past rates of growth, however, the current result shows a decline of the Chinese economy compared to other countries. Nonetheless, China shows outstanding results, so there is no need to worry, Chinese experts believe. According to the latest IMF statistics, the US economy grew by 1.6% in 2016, the Eurozone by 1.7%, Japan by 0.9%, South Africa by 0.3% and India by 6.6%.

With the result of 6.7% growth, China’s contribution to the global economy reached 33.2%, and the PRC remains the major driving force of the world economic growth. On top of this, the measure of the gross turnover in China for the first time surpassed the mark of Yuan 70 trillion (or approximately USD 10 trillion 200 billion).

Many economists today ask themselves a question, whether the slowdown of the economic growth in China would persist. In this respect, the director of the Research Centre for Development under the State Council of China, Li Wei affirmed that the Chinese economy is developing in L-shape, with the current transition from the vertical to horizontal trend and a reduced risk of a rapid decline in growth.

Despite the growth slowdown, the significance of the Chinese economy increased. This is reflected in the continued functional dominance of revenues over the GDP: last year, China’s revenues grew by 6.9% compared to 2015. Moreover, the economic structure keeps improving, the balance and the periods of economic development grew stronger. Thus, in 2016, the added value in services sector increased by 7.8% compared to 2015, with the indicator 1.1% higher than the GDP growth. The added value share in the Chinese GDP reached 51.6%, that is 1.4% above the 2015 figure.

As for the difficulties in structural regulation, overcoming them along with the further development of economy is a subject of the most important consensus in the Chinese society. «We cannot avoid difficulties in the structural regulation of the Chinese economy, but they are worth it,» the economic expert Liu Zhibiao believes.

The fluctuations associated with the restructuring of the supply chain are perceived as tolerable for the Chinese economy. In the short term, the decline in production capacity will have an impact on GDP and financial flows in some regions of the country, while the decrease in the share of debt will expose some companies to considerable risks creating additional tension. However, one should keep in mind that the structural regulation will release unused plots of land, loans and other scarce resources that may be effectively utilised in other industries, thus providing internal drivers for further growth.

Bank of Russia at full throttle to amass gold reserves

For the fifth consecutive year the Bank of Russia is the leader in the growth of gold reserves, reports the Thomson Reuters GFMS «Gold Survey 2017». As the authors of the document point out, the CBR bought 201 tons of gold in 2016, i. e. the largest amount compared to the other world central banks.

«At the same time the acquisition was maintained at a steady pace in October and November 2016, with an average of 36 tons per month, while gold prices went down,» the report says.

Analysts expect that in 2017, Russia will continue to buy gold in significant quantities (aiming at 200 tons), and this process would not be affected by the fluctuations in prices for gold or oil, or even by the changes in the exchange rate. For comparison: the total acquisition by other Central Banks should amount to approximately 250 tons in 2017.

The total gold reserves of Russia, as of 1 March 2017, were 1,654.7 tons. This is the 6th position globally among the three distinctive leaders: the USA, Germany and Italy.

In 1914, on the brink of the World War I the gold reserves of the Russian Empire were the largest in the world. The Empire possessed 1,311 tons of the precious metal, then an equivalent of 1 billion 695 million of golden Roubles.

This however did not last long. In 1918, over 50% of the total amount of gold was taken out of the country by the departing White army. Most of the rest was used to purchase machinery and equipment from the West on utterly unfavourable terms. As a result by 1923 the gold reserve of the USSR was only 400 tons, and by 1928 the amount of gold in reserves was catastrophically low: 150 tons.

Why does Russia buy gold now, and could the yellow metal be a panacea for economic problems? «The Bank of Russia is doing the right thing,» reckons Valentin Katasonov, professor at the Department of International Finance of the MGIMO University. "Experts know that the yellow metal is, in fact, significantly undervalued today. Therefore, the investors who want to get long-term results invest in gold.

Gold acquisition is quite favourable for Russia, since, among other things, this allows to support the local gold mining industry, which was in a lamentable state in the 1990s and in the beginning of the century. And to aggravate the situation, most of the produced goods at that time went abroad.

So, has Russia got a healthy gold reserve structure? Unfortunately no: the reserve is amassed today on the balance of the Bank of Russia, which is a bad idea. While gold is indeed a multifunctional metal, and one of its functions is to ensure the stability of the national currency, Russia does not employ a golden standard: there are no any formal statements that the Rouble is secured by gold. In fact, there are no more countries in the world where paper money can be swapped for yellow metal.

So, it would be safer to have gold as a strategic reserve kept in the hands of the state, i. e. the Ministry of Finance. The CBR is not the most suitable option for this, as it is not entirely dependent on the president and the Cabinet, and might take decisions that run counter to the interests of the Russian Federation. Including those on gold.

The goals of the CBR are clear. Gold is a good investment to ensure the international standing of the country. For instance, the rating agencies necessarily review the size of the gold reserves. On top of this, the large market players know that the growing gold reserves mean that a country’s economic authorities can be trusted. In fact, this indicator alone promotes the development of trade. So there is a certain demand for trust expressed in gold equivalent in the world today. And Russia should comply with this need.

Moscow and Beijing cut oxygen to the US dollar

Bit by bit Russia and China try to take the US dollar out of the Big Game, as reported some European media. Thanks to their close economic, financial and geopolitical ties Moscow and Beijing might create the necessary prerequisites for new global standards, thus putting an end to the current dominance of Washington finance and the US dollar.

Moscow and Beijing keep making new attempts to get the American currency «out of the game», the media report. On March 14, the Bank of Russia inaugurated the first ever foreign representation office, incidentally in China. According to the South China Morning Post, this step is part of a deal between the Russian Federation and the PRC to establish even stronger economic ties.

Additionally, both countries are seeking to facilitate the import of gold from Russia to China. According to the observers, strong gold thirst of Beijing, as well as that of Moscow, serves to create a new gold-secured currency, which in the future may replace the system of fiat money crushed by crises. It will therefore become increasingly difficult for the US dollar to maintain its current dominant position globally«.

The media sources explain that due to the close economic, financial and geopolitical cooperation, Russia and China «can create prerequisites for the new global standards and thus put an end to the current dominance of the US and the dollar.» One thing is for sure: the United States will no longer be able to live off other markets financially, the media maintain.

«As this is observed today, the US dollar is attacked on several levels,» the press emphasises. «Should several other countries join Russia and China the US dollar will have even less breeding ground. As a result, Washington will have fewer opportunities to influence geopolitics. At present, it is in fact possible to talk about Moscow and Beijing trying to neutralise the dollar, albeit bit by bit.»

Country of deprived: almost 20 MLN Russians live in poverty

Every one of them has a monthly income of just over 150 euros.

The Russian Federal Statistics Service ’Rosstat’ reports that in 2016 the poverty rate in Russia reached 13.5%. This means that there are some 19.8 million poor people in the country. This is 300,000 more than the previous year. However, as the experts of the Higher School of Economics report, Russians themselves assess their financial situation in even darker terms. In fact, 50.3% of citizens perceive themselves as poor. Russians who tend to rank themselves in this category quote having minors in charge and a the lack of housing.

According to the Rosstat’s methodology, people with incomes below the subsistence minimum are considered poor. At the end of 2016 this amount was 10,466 roubles (or EUR 166) per month for the employable population. «Unfortunately, the number of poor in Russia does not decrease. One of the reasons is the low level of minimum wage, used as a basis to calculate the amount of benefit for the needy. As a result we have an extremely low personal total income,» the analyst Irina Rogova explains.

There are some 5 million people in Russia who are paid a minimum wage salary, 7,500 roubles (about EUR 120). It is to no surprise that the Deputy PM Olga Golodets, responsible for the social sector in the Cabinet, referred to poverty in Russia as a country-specific phenomenon.

According to the politician, there are simply no professional qualifications at present that would deserve a salary of only 7,500 roubles. «Even if a person has only graduated from a middle school, his or her work should be evaluated at a somewhat different level. We face a serious debate on raising the minimum wage,» the deputy PM commented. The Prime-Minister himself promised to bring the minimum wage up to the calculated subsistence level. D. Medvedev announced this in his annual address to the State Duma.

«In the next few years, the minimum wage will grow to the amount of the subsistence level of a working person. We have all the means necessary to accomplish this,» the PM reported. The head of the Cabinet instructed the relevant state departments to draft the bill no later than May 20.

However, it’s too early to celebrate victory: it is for several years now that the authorities promise to bring the minimum wage up to the subsistence level. The two measures, however, are still as distant as ever.

Additionally, there are now challenges to the implementation of this idea. According to expert estimates, equalising the two indicators would require for the minimum wage to go up by almost 40%. Given that roughly 5 million people earn the minimum wage today, bringing their salaries up to the subsistence level would require an additional annual expense of 14 billion roubles. Due to the extended crisis, it is hard to find such funds: under the budgetary deficit the government barely allocated enough cash for the indexation of pensions.

Meanwhile, the real personal income keeps falling. In March 2017, it was down by 2.5% compared to March 2016. In the near future, experts predict, the situation with poverty will not evolve. «There is no magic potion from poverty. The process of raising the minimum wage to the subsistence level will be lengthy. At the same time, it is unlikely the wage growth accelerates. After all, in 2017, the labour market lists nearly three time more jobseekers than the number of vacancies on offer,» Irina Rogova observes.

Russia to open small business for foreigners

The Russian authorities plan to lift restrictions for foreigners on ownership and management of small and medium-sized enterprises (SMEs). The government agrees to admit the foreign SMEs to the Russian market on the same preferential terms as the domestic companies. One of the reasons for removing restrictions is that the goods and services offered by the Russian small businesses for the state contracts are often non-competitive. However lifting the restrictions will require a new system of verification that a foreign legal entity is indeed an SME.

Equal opportunities

The Russian Ministry of Economic Development suggests removing a 49% limitation on total share in the authorized capital of SMEs by the foreign legal entities. This follows from the amendments to the law «On the Development of Small and Medium Enterprises in Russia» drafted by the Ministry.

The proposed modification is not an absolute measure: a company with foreign participation would only receive the SME status if the investor is also an SME. For a foreign investor, not perceived as an SME under the Russian law, the 49% restriction on capital participation remains in place.

In the present context, a company is considered to be an SME-type due to the two main criteria: the number of employees and its revenue. A medium-size enterprise is any company with up to 250 employees and a peak annual revenue of 2 billion roubles (approx. EUR 31 mln). A small-size status is allocated to companies with no more than 100 employees and an annual revenue of up to 800 million roubles (or EUR 12.5 mln). The law also provides for a status of micro-enterprise with up to 15 people in staff and revenues of up to 120 mln roubles a year (EUR 1.9 mln).

The status of the company affects the allocation of benefits: the highest benefits go to small businesses. Tax benefits are available through the simplified taxation system or the single tax on imputed income. Besides, there is a provision for a tax break for small businesses, as well as preferential lease rates for premises. The state also guarantees for the SMEs a 15-% share in public procurement. Occasionally the Russian government supports small business with direct subsidies. In 2017, for instance, there are subsidies for partial reimbursement of the costs under leasing contracts and for compensation of interest on loans and borrowings.

No one in the government is opposed to the cancellation of the 49% threshold for foreign capital in the Russian SMEs. The amendment of the legislation is expected to facilitate greater involvement of foreigners in the SMEs and attracting of foreign investment, the Ministry of Economic Development and Trade projects.

As of December 2015, it is the Federal Tax Service that maintains the register of small and medium-sized enterprises. The database lists 20,400 medium enterprises and 266,900 small enterprises. In case of foreign participants, the tax service does not hold information on the foreign organisations, neither small, medium or large businesses.

The abolition of restrictions for the foreign SMEs will require the creation of a system for confirming the status of the foreign legal entities. There seems to be new scope of action for the small companies registered abroad, in particular for the Cyprus-based companies. Today, Cypriot companies are not considered offshore, since Cyprus is a member of the EU.

The Ministry of Economic Development proposes to introduce identification as a declarative procedure. The confirmation of compliance of foreign companies with the number of employees and the size of business revenue might be based on the opinion of an audit firm or of an individual auditor.

As a result, the bill came to the Russian Cabinet with a list of critical points that would require further approval by the government.