China: rebalancing dynasty
China’s economy might be slowing, but is it rebalancing? The dynamics of first-half growth suggest baby steps in the right direction. That export growth has moderated helps. Official retail sales as a proportion of output hit 43 per cent in the first half, the highest level over this period for more than five years.
What is more, official retail sales figures are understated. They do not include spending on services such as accommodation. Revenues of China’s largest budget hotel operators Home Inns and 7 Days, for example, rose an average 56 per cent over the past five years – three times the pace of official retail sales. And official income statistics are understated too. China’s middle classes derive about one-third of their income beyond taxable wages, such as from investments and rent. That proportion rises with wealth.
Trouble is, spending at this high end of the wealth spectrum is faltering. Many sources of grey income have been hit this year. Rental income and investment gains are suffering from continued tightening in the property market, an anaemic stock market and signs that the investment trust industry (where superior interest rates have buoyed returns) is in distress. Perhaps it is no wonder then that gaming revenues in Macau rose just 10 per cent in the past two months compared with a year earlier – a quarter of last year’s pace. Luxury spending is also weaker. Recent sales have slowed markedly at Stella International, a high-end shoe brand, while at its mass market peer Belle they are ticking along.
Infrastructure investment remains the default measure to prevent any slowdown turning to a slump. Fixed asset investment as a proportion of output has also risen this year – such investment by state-owned enterprises expanded one-quarter in June. Rebalancing will take longer than headline numbers suggest.
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