Slower Chinese GDP growth is not a bad thing if it’s happening for the right reasons. But it’s not happening for the right reasons.
Instead of reining in credit to try to curb over-investment, Chinese authorities have allowed a renewed explosion in credit in an effort to fuel a new investment stimulus. In the past six months, they pumped in RMB 10 trillion ($1.6 trillion) in new credit—$1 trillion in the first quarter of this year alone, 1/3 more than in the first quarter of 2009, the peak of the stimulus lending boom. Except this time around, almost half of the new funding took the form of risky, off-balance sheet “shadow banking” instruments that China’s new securities regulator, Xiao Gang, has likened to Ponzi schemes. The fact that this onslaught of new investment funding produced only a modest bump at the end of 2012, followed by a renewed slide, indicates that China is facing a steep decline in returns to credit expansion. In other words, it’s getting less and less GDP bang for its stimulus buck, as more and more credit and fiscal resources get locked into rolling over bad debt.
China’s National Bureau of Statistics (NBS) argues that because consumption now contributes more than half of GDP growth, China’s economy is seeing a successful adjustment to more consumption-led growth. What that ignores is that the GDP contribution from consumption and investment have both fallen, with investment falling off more, despite frantic efforts to prop it up. A rise in China’s trade surplus contributed 1.1 percentage points to GDP, but given the explained boom in “exports” to Hong Kong, serious doubts have been cast on whether that number can be believed. In March, China’s top planning bureau, the NDRC, laid out the state of the Chinese economy using the exact terms I’ve been using for over year to describe a “hard landing” scenario: “The foundation for economic turnaround is not firm,” the NDRC wrote. “Consumption is unable to provide a very strong impetus to economic growth, enterprises are less able and willing to invest, and external demand will not change for the better in the near future.”
Many analysts say China engineered a “soft landing” last year, but they’re wrong. The Chinese economy was coming in for a landing (by reining in runaway credit growth), but then it started to look like it was going to be a hard one, and they waved off (by opening the credit spigots again). Now they’re coming around for the another try, with bank regulators promising to crack down on the reckless explosion in shadow financing that has already produced a number of defaults. We’ll see, in the months ahead, whether China’s leaders are serious about reining in risk and forcing a real economic adjustment, or whether they’re hopelessly addicted to a credit-fueled investment binge. But they can’t keep flying around forever. The meager returns to China’s latest credit splurge suggest that the fuel in China’s gas tanks is running out. The engines are already starting to sputter. Their instincts are to pull up, when they really should be landing the plane.
—Patrick Chovanec
Comments
Barry Naughton
Are tiny fluctuations in China’s reported GDP growth rate actually significant? In one sense, the market’s reaction is frivolous. China’s GDP numbers are extremely imprecise, and variations of a couple tenths of a percentage point are well within the margin of statistical error. US GDP figures for the first quarter of 2013 haven’t even been published yet, and after they are published they will be revised several times (and typically revised by amounts larger than the shift in Chinese growth being reported here). The idea that Chinese statisticians are accurately picking up tiny fluctuations in the overall growth rate is preposterous.
But it a broader sense, I agree with Patrick that the recent data from China is significant, and roughly for the same reason he lays out. Lurking in the background of the current numbers are the broader changes of which all Chinese economists are aware: the Chinese economy is ending its super-high growth phase; labor force growth has essentially ended; and China is facing a new era in which the underlying growth potential of the economy is less. This change is overall not a bad thing. The reason the high growth phase is ending is because China has graduated early. Increasingly a middle income country, China has higher wages and a more diverse domestic demand pattern. These changes reflect a higher standard of living and an economy with broader capabilities.
Damien Ma
--I think the chatter about the growth rate coming in a bit lower than forecasts reflects, in part, the fact that the market may not have fully adjusted to the reality of China being able to sustain growth in the 7%-8% range going forward.
--Should the growth rate cause worry? There are always plenty of things to be concerned about in the Chinese economy, such as local debt and sporadic asset bubbles. But if it’s true what the NBS reports, that more than half of the 7.7% growth came from final consumption, than that’s actually a positive development. Others may have better numbers or find the NBS estimate not credible. Though we might not know for sure until the numbers have been fully digested.
--Most people seemed to have missed something that Premier Li Keqiang said, which is that according to projections, he thinks to reach a “moderately well off society” (xiaokang shehui) by 202—the officially espoused goal—China only needs an average of 6.8% growth. And in the State Council meeting Li just spearheaded on the economy, there was little indication to suggest that Beijing is ready to pounce with another stimulus. Instead, his emphasis was very much on banking on “reform dividends.” It is a clear recognition that the era of “demographic dividends” in China is coming to a close.
--And this leads to the final point. If China leverages the slow down as a way to accelerate meaningful rebalancing (I noticed the People's Bank of China’s Yi Gang said yesterday that the central bank will make daily fluctuation of RMB even more flexible very soon, even though the economy is slowing), then I wouldn't be overly concerned about this growth rate over the next few years. The slow down is actually an opportunity to push for more rebalancing.