20 April 2019

Do China’s numbers add up to sustainable growth?

Macro data released by China shows a broadly recovering economy supported by domestic growth momentum and sufficient liquidity. But still, the key question of whether China’s growth is sustainable looms over the markets. There are two parts in this question: the long-term structural sustainability and the short-term cyclical recovery of the Chinese economy.

Here, we shall focus on the cyclical issue because it has been a key question overhanging the Chinese stock market and causing price volatility. Market opinions on the outlook are split. However, there is economic evidence for a sustainable cyclical recovery. What’s more, the Chinese labor market seems to be going through structural rebalancing, which should help sustain growth in the long-term.

A quick word on the structural perspective: double-digit growth has gone for good because the new leadership’s policy objective has changed from pursuing growth quantity to focusing on growth quality. As a result, their policy reaction has also changed from chasing growth targets at all costs to prudent management based on structural reform needs. This shift in China’s macro policy focus can be seen in Beijing’s tolerance for slower growth rates in the present recovery cycle as it refrains from indiscriminate monetary and fiscal expansion.

Contrary to conventional wisdom, the evidence shows that exports have not been driving China’s growth. In fact, net exports, one of the contributors to GDP growth, have been a drag on Chinese growth since 2009. The domestic sector has taken over as the key growth driver, suggesting that China’s long-term growth sustainability depends on capital allocation efficiency. Given this new paradigm, China’s annual GDP growth rate is expected to move from 8.0 percent towards 7.0 percent in the coming decade.

Cyclically, major demand indicators, such as freight traffic, electricity consumption and vehicle sales, have stabilized at moderate growth rates. Such mild growth momentum will not cause economic overheating. Indeed, inflation has remained well contained, with the core annual inflation rate staying below 2 percent since late 2011. Unless food price inflation spills over to cause a sustained rise in core inflation, there is little risk of sharp monetary tightening hurting growth in the coming year.

What about the property bubble? There has been a concern in the financial market that Beijing will tighten monetary policy to curb property price inflation. In my view, macro policy tools like interest rate hikes cannot be used to address micro, sector-specific inflation such as property prices in the absence of broad inflationary pressures. Beijing is more likely to use selective policy tools to curb property price inflation. Therefore, the risk of policy tightening required for controlling the property bubble should not be exaggerated.

The outlook for the inventory cycle is improving. This is seen in the rise in the ratio of the new-orders purchasing managers index to the finished-goods-inventory PMI from a bottom of 0.9 in mid-2012 to 1.2 in October 2013. With the growth of new orders outpacing finished-goods inventory on a sustained basis, this turnaround of the inventory-cycle indicator suggests that destocking may have come to an end. Restocking will become a cyclical force in boosting future GDP growth.

Further, China’s growth recovery is becoming broad-based, with the services sector gaining momentum. For example, the official non-manufacturing PMI, which covers both services and construction activities, rose to a 14-month high in October. This is consistent with the improvement shown by the HSBC services PMI in recent months.

The labor market has remained resilient, implying a gradual improvement in income growth. This, in turn, should support consumption growth in the coming quarters. China’s urban labor demand-supply ratio has remained above 1, the boom-bust line, since late 2010. This suggests that labor demand has continued to outpace labor supply despite volatility in demand and supply.

More crucially, the ratio for the western region has shown a more remarkable improvement than that for the rest of the country, suggesting that the labor market improvement is rebalancing towards the inland. If this trend continues, it will aid China’s economic rebalancing in the long term.

In terms of policy, this cyclical recovery is likely to be sustainable because unlike the case with its previous stimulus packages, Beijing has refrained this time from indiscriminate spending funded by bank loans. Fiscal spending this time is more focused on boosting those areas where growth is urgently needed, including public housing, railway and urban (underground) and IT infrastructure. Most of the planned funding comes from the government’s idle cash (amounting to 3.4 trillion yuan (US$554.40 billion), or 6 percent of GDP) parked at the central bank instead of indiscriminate monetary expansion via bank credit. Beijing has also implemented some tax reforms to reduce the tax burden of small and medium-sized enterprises. Hence, both macroeconomic and policy factors argue that this recovery should be sustainable.

Chi Lo, senior strategist, BNPP IP (Asia) Ltd., and author of “The Renminbi Rises: Myths, Hypes and Realities of RMB Internationalisation and Reforms in the Post-Crisis World”, Palgrave Macmillan 2013. Opinions here are of the author’s and do not necessarily reflect BNPP IP’s.



Senior economist of BNP Paribas Investment Partners (Asia) Ltd. and author of “China’s Impossible Trinity – The Structural Challenges to the Chinese Dream”

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