19 March 2019
China keeps printing money to support inefficient state-owned enterprises. Photo: Reuters
China keeps printing money to support inefficient state-owned enterprises. Photo: Reuters

Beijing resorts to old-style monetary stimulus

China posted a 6.7 percent growth in its gross domestic product in the first quarter, slightly better than market expected.

However, the picture is less encouraging if you look into detailed figures. It seems likely that China will do a repeat of the 4 trillion yuan (US$618.18 billion) stimulus package it unveiled in 2008.

Investment has underpinned the country’s economic growth in the first quarter. Fixed-asset investment jumped 10.7 percent to 8.58 trillion yuan, up 0.7 percentage point from the same period a year earlier.

However, it’s worrying to see that investment from state-owned enterprises (SOEs) soared 22.3 percent, 11.4 percentage points faster than the year before.

Infrastructure investment also surged 19.6 percent, up 2.4 percentage points from a year earlier.

By contrast, private sector investment only increased 5.7 percent, slower than the GDP growth rate and down 4.4 percentage points from a year ago.

That reminds me of the promise made by the new Chinese leaders when they took over the helm to push ahead with market reforms and let market play a decisive role in allocating resources.

They had also vowed to encourage private investment and cut back SOE investment to boost efficiency and restructure the economy.

Apparently, Beijing has so far failed to deliver on its promise. The authorities have started to use the old trick of massive government-led and infrastructure spending in a bid to avert a hard landing.

Where does the money come from? Bank loans.

In the first quarter, China’s newly-added loans reached 4.61 billion yuan, up 26 percent from the year before and surpassing market estimate by nearly 10 percentage points.

That has resulted from a series of cuts in interest rates and the reserve requirement ratio, as well as requesting banks to increase lending to SOEs and infrastructure projects with “window guidance”.

The moves are poised to stimulate growth, boost profits for banks in the short term, and mitigate the impact of rising bad loans.

However, China is already suffering from excess capacity, redundant construction projects and rising bad loans.

More lending to low-efficient SOEs and infrastructure projects would only buy some time for the authorities, but it won’t solve the problem.

By contrast, the consumption sector, on which the country’s leaders are depending a lot to boost the economy, has shown signs of slowing down.

China’s household disposable income rose 6.5 percent in the first quarter from a year ago, down 1.6 percentage points from the growth a year earlier. It also marks the first time that income growth has lagged behind GDP growth since 2011.

Meanwhile, the unemployment rate stood at 5.2 percent as of the end of May, up 0.2 percentage points from late last year, according to the spokesman of the National Statistics Bureau.

In that sense, the fragile real economic growth is reflected in the job market.

Workers will cut back spending if they expect less pay rise and tougher job market competition in the future.

That is to say the better-than-expected GDP growth data in the first quarter actually has some worrying revelations.

Among the three growth engines, both export and consumption may not be able to sustain, while robust investment growth is mainly driven by the government.

China will maintaing its relatively loose monetary policy in the coming months due to various changes in the economy and the financial markets.

However, the policy stance would be more “prudent” than last year, according to a commentary published by the Xinhua News Agency on Monday.

That could be a sign that the government would reduce monetary easing moves and refocus on reform after the economy has come out of the woods.

This article appeared in the Hong Kong Economic Journal on April 19.

Translation by Julie Zhu

[Chinese version中文版]

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The consumption sector, on which China’s leaders are depending a lot to boost the economy, has shown signs of slowing down. Photo: Bloomberg

Hong Kong Economic Journal columnist

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