21 October 2016
An 'authoritative person' said in People's Daily (left) that L-shaped growth lies ahead for China, but the worst-case scenario could see an へ-shaped trajectory for the economy. Photos: People's Daily, Baycrest
An 'authoritative person' said in People's Daily (left) that L-shaped growth lies ahead for China, but the worst-case scenario could see an へ-shaped trajectory for the economy. Photos: People's Daily, Baycrest

China’s growth could fall a lot further

People’s Daily, the Chinese Communist Party’s top mouthpiece, carried on its front page earlier this week an article that sought to discuss the fundamentals of the mainland economy.

The article was carried in the form of a question-and-answer session with an “authoritative person” whose identity was not revealed. 

It was, in fact, not the first time that the so-called authoritative person had wanted to elaborate his views.

The same newspaper ran two similar interviews earlier, one in May 2015 and the other in January this year, but those Q&A sessions didn’t draw much public attention.

So, what’s different this time?

The Wall Street Journal revealed last week that Beijing has begun to censor unfavorable forecasts of economists and that the state media has been instructed to focus on spreading “positive energy”.

Guotai Junan Securities chief economist Lin Caiyi (林采宜) is said to have received two stern warnings in the recent past for her outspoken comments that strayed from the official line.

Among the remarks that earned the displeasure of authorities were ones Lin made in July last year when she suggested that investors should increase US dollar assets due to looming renminbi depreciation, according to the Journal.

Beijing’s actions have exacerbated people’s worry that the Chinese economy has become so weak that even analysts and economists have been told to shut up.

Only the party mouthpieces can comment now, with “positive energy”.

In the May interview last year, People’s Daily cited the “authoritative person” as saying that the economic slowdown is nothing to worry about.

The tone changed in the second Q&A this January, when the anonymous official said that economic growth rate, government revenue expansion pace, producer price index and business profits were all declining, and that an L-shaped phase lay ahead rather than an immediate rebound.

Now, in the most recent article this week, the “authoritative person”, while ruling out the likelihood of any V-shaped or U-shaped rebound, stressed that the L-shaped phase won’t end in just a year or two.

Beijing appears to have become more honest, but the question still remains out there: What lies ahead — an L-shaped trajectory or even something worse, such as a へ-shaped one?

The Japanese kana script “へ” may represent a more realistic trend.

The Chinese economy has basically followed a へ-like path in the past seven years, when the gross domestic product growth rate tumbled by almost half from peak levels to below 7 percent. And the rate may drop further.

“Supply-side reforms” is Beijing’s latest platitude, but it’s all about old tasks like deleveraging, destocking, weeding out overcapacity and lowering costs. In a market economy, all these can be realized with the market’s self-adjustment after the bursting of bubbles.

But forget about such self-adjustment in China as vested interests in the Party are putting up stiff resistance to reforms. Just look at how some zombie state-owned enterprises are being resurrected, despite Beijing’s supply-side reform drive.

An Aluminum Corp. of China (Chalco) smelter in Gansu (甘肃) province, which accounts for one sixth of the firm’s annual production, had its electricity bill, the major production cost, slashed by 30 percent last October, the WSJ reports.

The 500,000-ton-per-year plant should have been shut down entirely, yet it has only seen 120,000 tons of capacity trimmed.

Deleveraging is equally unattainable when China’s total debt load has soared to over 270 percent of its GDP, from 150 percent a decade ago. And the estimate is on the conservative side as shadow banking figures are not factored in.

What have been fueling debts are government-led investments, which are usually made through loans.

The Party needs such investments to propel GDP growth, and to do so it has to relax credit standards.

China’s fixed asset investments have been growing steadily at an annual rate of around 20 percent, at a time when the economy is becoming increasingly susceptible to a debt crisis.

Destocking is unrealistic when overcapacity cannot be tackled, and the latter itself is a result of stalled deleveraging as authorities encourage more loans to fund new investments for the sake of GDP growth.

It appears that the Party itself is to blame for the nation’s economic woes. 

The Chinese economy expanded by 11 percent annually in the past decade when its GDP almost tripled, and the nation is now sitting on gigantic stockpiles of products.

Michael Pettis, professor of economy at Peking University, notes that the total value of unsold homes in China may be equal to half of the GDP last year, and that the total stockpiles of all industries can be 1.5 times the GDP.

So what should China’s real GDP growth have been in the past decade if we didn’t have to see any stockpiles built up over the period? Well, my back-of-the-envelope calculation stands at 6.5 percent, subpar compared with other Asian economies.

As China moves closer to demand-supply balance in the future, and as the demographic dividend turns into a demographic sinkhole, the nation’s growth rate could even plunge by half or a third from the current level of 6.7 percent.

This article appeared in the Hong Kong Economic Journal on May 12.

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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