Despite international skepticism, China’s first-quarter data suggests economic resilience amid global challenges, while structural transition prevails in the medium term.
According to new data, China’s economy grew by 6.7 percent year on year in the first quarter. While it reflected the slowest quarterly growth since the global financial crisis, some key indicators such as fixed-assets investment growth and retail sales suggest that the economy is stabilizing.
In the past three months, the performance of the Chinese economy has steadily improved as exports and industrial profits have returned to growth while manufacturing is picking up and power use is accelerating.
The current leading sectors, including internet-related industries and advanced manufacturing, signal fast growth. In turn, investment in the property sector grew 6.2 percent.
While there are multiple signs that the slowdown in the economy is “bottoming out”, complacency is not an option.
Domestically, the ongoing transition from investment to consumption cannot come without volatility.
The importance of the structural transition
Some international observers believe that, as Reuters put it, the “Chinese economy shows signs of debt-fueled recovery”.
The rebound is seen as fueled by a surge of new debt, especially in factory activity, investment and household spending.
The claim is that Chinese policy authorities are navigating the economy “out of a slowdown through massive stimulus, rather than structural reform”.
How valid are these concerns?
The role of fiscal and monetary easing
In the past few years, Chinese Premier Li Keqiang has pushed structural reforms to support a medium-term rebalancing toward consumption and innovation.
He has shunned another huge stimulus, which would contribute to government debt, favoring targeted fiscal measures instead.
Finally, he has promoted gradual deleveraging to reduce local government debt, which accumulated after the 2009 stimulus.
Like fiscal policy, monetary policy has sought to support demand.
Since 2014, the People’s Bank of China, the central bank, has cut benchmark lending rates six times, while lowering banks’ reserve requirements and injecting liquidity into the financial sector, hoping to maintain lower borrowing costs.
It is not the case – as some observers argue – that “debt-fueled growth” has only been possible because of current fiscal and monetary policies. In their current form, the latter were not the first preference of Premier Li or PBoC governor Zhou Xiaochuan.
Yet, as policymakers, both Li and Zhou must take into account domestic trends and global constraints as they implement policies that make most sense in a challenging environment.
More importantly, the current massive restructuring effort suggests that the central government will no longer tolerate new debt-taking.
In the next five years, China’s steel sector plans to reduce capacity by 100-150 million metric tons, while the coal mining sector will cut capacity by 500 million tons, with another 500 million tons to be restructured in the next three to five years.
If current overcapacity is reduced by 30 percent in targeted sectors, these cuts would translate to layoffs of up to three million workers in the next two to three years.
The restructuring challenge
Neither the restructuring nor structural transition can or will happen without pain. As problem assets mount, the profitability of Chinese banks is likely to decrease in 2016.
At the same time, the problem assets ratio at major banks has risen from about 4 percent to over 5 percent and the worst will only ensue in the next year or two as restructuring takes off in ailing industries and troubled regions.
With structural reforms, these challenges can be managed, however.
Unlike most advanced economies, China is engaged in far-reaching reforms. Due to the constraints in the international environment, the latter cannot move as fast as policymakers initially hoped, however.
China’s new GDP range target of 6.5-7 percent is a balancing act.
It does not reflect a choice between either reforms or deleveraging; both are necessary.
For more of Dr. Dan Steinbock’ articles, see http://www.differencegroup.net
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