21 October 2016
Shanghai's GDP expanded 6.8 percent in the first three quarters of the year, a tad slower than the Chinese economy's officially announced growth of 6.9 percent. Photo: internet
Shanghai's GDP expanded 6.8 percent in the first three quarters of the year, a tad slower than the Chinese economy's officially announced growth of 6.9 percent. Photo: internet

The slowdown in China’s economic growth isn’t unique

President Xi Jinping took 30 billion pounds (US$46 billion) in deals and investments to Britain during his state visit.

The outpouring of money is not surprising, as China is fighting overcapacity.

Chinese funds need a way out, but the truth is that only Beijing and the Communist Party’s princelings can channel money overseas.

Others, even Hong Kong tycoon Li Ka-shing, are not allowed to do so.

Is there any logic behind this?

When everything must serve a political purpose, we have reason to doubt the economic data from mainland authorities.

Surely, statisticians are expected to play with the figures so as to shore up confidence.

Also, not a few analysts at multinational institutions are eager to embellish these edited figures.

One example is Goldman Sachs, which said in a recent report that China’s economic transformation has worked well.

It pointed out that although the country used 4-5 percent less steel and cement year on year for construction during the past 12 months, gasoline consumption soared 19.1 percent in the same period.

The report said this is a sign the Chinese economy is now propelled by the private sector, vibrant consumption of expensive and durable products in particular, and has become less reliant on export and investment.

Now, notions like this need a reality check.

Official data shows the country’s average annual increase in crude oil imports was 4 percent between 2010 and 2013, while average annual growth in domestic oil production has been less than 1 percent since 2010.

These figures do not appear to be consistent with a 19.1 percent surge in gasoline consumption.

In addition, car production in China slumped 23 percent in the 12 months to August 31.

Goldman Sachs may need to pander to Beijing’s desire to gloss over the slowdown in the economy’s growth, and the bank may also need to sell its related products with a rosy forecast.

When some analysts choose to remain unswervingly upbeat about the prospects for the economy, investors should maintain a sober mind of their own.

Then, exactly how important is the role of consumption?

In past decades, the share of gross national consumption (the sum of private spending and government spending) in China’s gross domestic product declined steadily from more than 70 percent in the 1970s to 50 percent in 2007.

Last year’s figure was 51.2 percent.

Private consumption has remained at around 37 percent of GDP since 2007.

The bleakest forecast for China’s GDP growth is 4.5 percent from British consulting firm Capital Economics.

Nomura Securities’ figure is around 5 percent.

Numerous pieces of official data have led to skepticism about Beijing’s announcement that economic growth in the first three quarters of the year was 6.9 percent.

China’s unemployment rate, based only on the number of registered jobless residents nationwide, has been at around 4 percent since 2007, and even the turbulent years of the financial tsunami failed to push up the figure.

In the second half, growth in electricity generation in China has largely stalled.

Previously, growth was as high as 30 percent month on month, but it slipped into negative territory in July and September.

There is a strong correlation between power output and that of the economy, and there’s no reason that GDP growth can maintain its momentum amid dwindling power generation.

The 6.9 percent growth rate is, indeed, measured in real terms, so it is calculated by dividing nominal GDP growth by the rate of inflation.

In normal circumstances, nominal GDP growth is higher than real GDP growth, unless the economy is stuck in deflation.

And this is exactly the situation in China, where nominal GDP growth was 6.2 percent.

The last time the country experienced deflation was in 2008-09.

Deflation is bad news for debtors.

Sinosteel Corp., for instance, just extended the date when investors can start redeeming its bonds and also deferred interest payments, citing liquidity problems.

How Beijing is trying to buoy up its economy is nothing new, either: more investment and further monetary easing.

When banks are mandated to pump liquidity into the economy, lax lending standards and credit quality become a real concern.

What is noteworthy is that since the stock market meltdown, hot money — some funded by margin financing, has been flowing into the bond market, pushing down the yield of popular corporate bonds to levels even lower than those of bonds issued by state-owned lenders.

This bond market bubble might be the next to burst.

The Chinese economy’s nascent downturn, nothing unique on its own, falls within the scope of modern economics.

Representative studies include an insightful essay, “The Japan syndrome comes to China“, by Columbia University’s Jeffrey Sachs, and papers by Michael Pettis, professor at Peking University’s Guanghua School of Management, on global imbalances and their impact on China.

This article appeared in the Hong Kong Economic Journal on Oct. 22.

Translation by Frank Chen

[Chinese version 中文版]

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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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