China debt dilemma: five things to look out for in Q3 GDP

Posted on October 17, 2016

On Wednesday China’s National Bureau of Statistics will report its latest quarterly estimate for economic growth, which has stabilised after the world’s second-largest economy was rocked by a dual market and currency crisis in January. For Beijing, economic stability is paramount as it turns its focus to reining in runaway corporate debt levels. 

Investors and economists were largely reassured by the 6.7 per cent growth figure reported for the first and second quarters, in line with the 6.5-7 per cent target prescribed by Chinese policymakers late last year. But they will be asking whether a credible debt-reduction effort is really compatible with continued growth in that range. Here are five things to look out for:


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The property sector and its contribution to growth

Real estate has been the driving force behind China’s economy this year. Some analysts estimate that after factoring in property developers’ demand for cement, steel and other construction materials, it ultimately accounts for more than half of total investment. 

The sector is a contradictory one, characterised by gravity-defying price surges in China’s largest economic centres but also oversupply and stagnation in smaller cities. As part of Beijing’s larger effort to control ballooning debt levels, more than a dozen municipal governments have recently introduced measures to cool overheated markets — a potential drag on future growth. 

On Friday, the National Bureau of Statistics will release its monthly survey of 70 municipal property markets. 

Infrastructure and private sector investment

The Chinese government has pledged no more repeats of the debt-fuelled investment surge that maintained the country’s economic momentum through the depths of the global financial crisis. The pain felt in coal and steel-producing regions, especially in the first quarter of this year, was evidence of Beijing’s commitment to a “new normal” of slower, more balanced growth. 

But with private sector companies failing to pick up much of the resulting slack, China’s economic planners have encouraged infrastructure investment by state-owned enterprises. 

While this is not necessarily another growth-for-growth’s-sake splurge on wasteful projects given the real need for beneficial investment in everything from public transportation to water treatment facilities, it cannot continue indefinitely given the state sector’s high debt levels. 


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Industrial production

Less than a year after annual steel and power output contracted for the first time in two decades, manufacturers and even the long-suffering coal and steel producers have enjoyed a summer resurgence. 

Coal and steel producers should continue to benefit as Beijing weeds out weaker players in both sectors. While ministers have consistently rejected international criticism of the havoc wreaked by Chinese steel exports, the State Council is standing by its commitment to reduce steel capacity.

Inflation

Chinese producer price deflation disappeared in September for the first time since early 2012, thanks in part to higher coal and steel prices. Producer prices increased 0.1 per cent year-on-year while consumer prices rebounded 1.9 per cent on an annual basis, up from 1.3 per cent in August.

This progress should be reflected in an acceleration in nominal GDP growth — continuing a trend evident in the second quarter — and a larger deflator, which is the broadest measure of price changes across the economy. 

Most importantly, continued increases in inflation will help companies pare back their debt loads. 


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Services and private consumption

As evidence that a rebalancing of China’s economy is well under way, consumption contributed 4.9 percentage points of the first half’s annual growth rate of 6.7 per cent. Investment accounted for just 2.5 points while net exports subtracted 0.7 points. 

But there are signs previously robust services growth is slowing, especially after last year’s stock market crash. 

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