So now we know. China’s statisticians have declared the country’s GDP grew at 7.7% last year, the equal lowest in more that a decade and just lower than last year’s 7.8%. Although numbers from China’s Party-controlled Bureau of Statistics are notoriously fudged and usually revised about six months down the track, it is clear the Chinese economy continues to slow. Even using a different metric — credit growth, electricity consumption and rail freight, which Chinese Premier Li Keqiang says gives a better picture of the economy — it is clear China’s economy is trending downwards, with the first two down for December.
Australia’s economy is the most economically entwined with China’s, so that is not good news for our own growth prospects. The only upside is that our dollar falls along with China’s headlines growth, making our exports more competitive.
China’s continuing “economic miracle” in recent years has been fuelled first by a massive, undisciplined multitrillion-yuan (estimates vary and range as high as 20 trillion yuan) stimulus program from 2009-2011 aimed at dodging the global financial crisis, which super-charged domestic debt problems. There has been an unprecedented credit binge during the past two years, much of it in the lightly supervised, often unregulated and off-balance sheet shadow banking sector. This has caused “total social funding” — the benchmark measure used by economists for credit growth in China — to surge by 20.2% and 18.4% year-on-year in 2012 and 2013 respectively, according to calculates by UBS, an investment bank. That’s more than double GDP growth in each year.
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That means credit is no longer fuelling economic growth as it used to. Instead, it’s being used to roll over mounting debt by local and provincial governments; being siphoned off into still-booming property markets; and being spent on Western-branded luxury goods, from Hermes scarves to custom-built Maseratis, due to tight restrictions on where Chinese can store their cash. Vast sums have also been siphoned offshore by the wealthy as insurance against any domestic economic crash. Property markets in cities like Sydney, Vancouver and London have been the beneficiaries.
The disparity between credit growth and GDP stands as testament to just how inefficient the China model has become, another danger sign for Australia.
The vast cost of its recent growth, together with a long-overdue kickstart for economic reform, now has global economists identifying China as the biggest single risk to the still-stuttering global recovery.
Chinese President Xi Jinping now faces the herculean task of making the nation’s governments and their largely inefficient state-owned enterprises tighten their belts while keeping growth ticking along at enough of a clip to keep a lid on unemployment, and the much-feared social instability that could bring. The seemingly random GDP growth figure produced by Li Keqiang needed to prevent this is 7.25%, so don’t expect official figures to fall much below that any time soon.
A laundry list of economic reform was unveiled at last November’s meeting of the Communist Party’s top brass. Xi’s first year as boss was all about consolidating power within a party riven by myriad, cross-connecting factions and interest groups, many of which now see living the lifestyles of the rich and famous as an inalienable right. Xi figured he had to keep growth humming along and their pockets full to buy their compliance. It worked, but barely, and the time to pay the piper looms. So what next?
“It’s an economic management tightrope act that has never been attempted before on such a scale, and it will be some time until the results become clear.”
Economists gnash their teeth and run their models to decide whether they will call growth for 2014 at 6.9% or 7.7%, then tweak their figures time and again. There’s is also endless discussions about whether the Communist Party will decided to lower official targets in the latest sacred but broad-brush five-year plan (2011-2016) to 7% for this year, or for next year and the year after. Credit growth, the more important figure, is expected to be pegged back to between 15% and 16%; if this is overshot, you will know the reform program is lagging. Likewise if power consumption growth does not start subsiding.
Former premier Wen Jiabao was fond of saying China’s economy was “unstable, unbalanced, unco-ordinated and ultimately unsustainable”, then spent a decade not doing much about it.
It’s these for “uns”, as the Chinese like to say, that need fixing. The downward trend of China’s GDP shows both that the old spending tricks don’t work and that the leadership is comfortable with lower growth as it tries to strip out over capacity in heavy industry.
There are some early, encouraging signs that some changes are afoot, but it’s a long and complex game.
The scale and scope of the economic problems Xi must address include changing China’s industry mix away from heavy industry and a dependence on exports towards services and consumption. He must also begin urgently remediating the country’s devastating environmental issues — choking smog levels in Beijing were off the chart again last week — making step changes in productivity and creating a better and more universal social safety net. He must remove inefficient micro-economic strictures such as interest rate fixing and currency controls. And that’s just the biggest-picture stuff. Lastly but by no means least, Xi is trying to make a more open economy as he creates a more restrictive political and censorship environment that appears very much counter-intuitive — and there are very real questions over whether the two strategies can succeed in tandem, even in the medium term. Adam Smith, certainly, would have none of it.
It’s an economic management tightrope act that has never been attempted before on such a scale, and it will be some time until the results become clear.
Few are suggesting China’s economy will collapse any time soon; there’s still plenty of growth left in dragging the next 100 million people out of poverty, and then next 100 million, and so on. So Australians, most of whom probably don’t realise how tethered their wellbeing is to this game, should watch with trepidation as the trimmed-down Xi embarks on his high-wire act.
Don’t mind the numbers too much, but be afraid, very afraid, if he falls.