22 April 2019
With the Chinese economy losing traction, key cities like Shanghai have stopped announcing GDP growth targets. Photo: Sunny Sky for EJ Insight
With the Chinese economy losing traction, key cities like Shanghai have stopped announcing GDP growth targets. Photo: Sunny Sky for EJ Insight

The China slowdown and its implications

China’s economy has been cooling down since 2008 and uncertainties have been on the rise. This has prompted President Xi Jinping to lay out social stability as a key task for the government.

The mainland’s economic well-being is also important for Hong Kong as any troubles or social upheavals resulting from poor growth there could easily spread across the border.

Many people in the mainland were hardly in the mood for Lunar New Year celebrations as there has been a surfeit of negative news. Some figures were actually not all that bad, even though they were weaker compared to the levels in previous years. But given that the economic fundamentals are yet to point to signs of a rebound in the growth rate, it’s no surprise that people are on the tenterhooks.

Some key statistics this year have indeed painted a gloomy picture.

The new home price index recorded a 5.1 percent year-on-year decline in January, the sharpest drop following a five-month slide since the index’s introduction in 2011. Some second-tier cities like Hangzhou even suffered a 10.5 percent slump.

This is a cause for concern as the Chinese economy relies substantially on the realty sector, with building materials, construction industry and related sectors and services said to be accounting for roughly a fourth of the country’s gross domestic product.

Consumer price index was at 100.8 in January compared to its mid-2011 peak of 106 and China is on the verge of a “consumption deflation”, just like the situation in Japan. Similarly, producer price index has also been hovering around low levels since 2011 and last month’s figure was 4.3 percent lower than a year ago, indicating tepid internal and external demand.

Doing business in China is just getting harder.

Capital flows 

The renminbi has ended its stellar rise, with a 2.4 percent slide last year. A new credit-crunch phase is also looming as fund flows from overseas fall amid the currency depreciation.

China saw its first net capital outflow last year. The nation’s renminbi funds outstanding for foreign exchange (外匯占款, since renminbi is not freely convertible, the number measures the capital inflows that are converted into renminbi) increased by 250 billion yuan (US$39.97 billion) a month on average during the first quarter of 2014.

But the indicator has been declining over past two months. I would say the drop is more because smart capital is pursuing better returns elsewhere, rather than due to a spike in China’s state-led outbound investment.

HSBC Producer Price Purchasing Mangers’ Index, which hit an all-time high of above 60 in 2009, broke 50 in 2010 and has since failed to show any sustained recovery. The index stood below 50 in the fourth quarter last year and remained below the “contraction/expansion line” in January – an indication that industrial output has waned.

The Chinese central bank has been rolling out stimulus policies to give a lift but almost every time the effect has whittled away quickly.

HSBC China Services Purchasing Managers’ Index basically followed a similar pattern. The January index stood at 51.8, a long way down from its 2007 peak of 62.

Growing imbalance

More than a decade ago there have been warnings from scholars that the Chinese economy was too dependent on investment, suggesting the pie of internal consumption was inadequate. Beijing then unveiled initiatives for structural reform and economic rebalancing with an aim to spur internal demand. But what has it achieved over the past decade?

Back in 2000 private consumption’s contribution to GDP was 46.7 percent, compared to investment’s share of 34 percent, according to World Bank data. That compared poorly with the levels in most developed countries.

Over the years, the situation worsened even as the government came up with a slew of packages to encourage people to spend more. By the end of 2013, investment accounted for 47 percent of economic output while the figure for private consumption had been reduced to 34.1 percent.

Beijing’s rebalancing efforts have effectively made the economy more imbalanced. 

Vested interests

Communist cadres have now started to propagate the notion that a slower (medium to high) growth rate is conducive to enhancing quality growth and boosting people’s living standards.

But how does one explain the shrinking share of private consumption? How can people have a better life if they indeed spend less?

And why is the role of investments expanding? I believe the answer lies in the choice of the development model.

The Communist Party keeps a tight hold on the Chinese economy with officials given virtually unlimited powers to meddle in market activities. Thus the secret of doing business in the country is to court those in authority and adhere to their will and personal interests to form a syndicate.

Such kind of syndicate is entirely different from the concept of bourgeoisie in the theory of Marxism and it also differs greatly, both in nature and extent, from the kind of collusion seen between the authorities and the business sector in western countries.

Sustained government-led investment is central to ensure the interests of these syndicates. One should bear in mind that in an authoritarian regime, investment is usually the child of rent-seeking, nepotism and corruption.

Examples abound of how officials and businessmen are able to extract profits in the process — from land grabs, auctions and transfer to licensing and approval to infrastructure planning and project bidding. The more investments that are planned and implemented, the more interests they can milk for themselves.

That explains why the Chinese economy is just getting more addicted to investment. It is a built-in, institutional issue.

This article appeared in the Hong Kong Economic Journal on Feb. 23.

Translation by Frank Chen

– Contact us at [email protected] 


Former full-time member of the Hong Kong Government’s Central Policy Unit, former editor-in-chief of the Hong Kong Economic Journal

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