Despite concerns, China’s economic planners aim for high GDP

Posted on October 23, 2016

Economic data released in China last week revealed the government’s two-steps-forward, one-step-back approach to macroeconomic management.

While the rest of the world fretted about runaway debt levels in the world’s second-largest economy earlier this year, Chinese economic planners kept their eyes firmly on their target range for gross domestic product growth, set at 6.5 to 7 per cent.

With the National Bureau of Statistics reporting three straight quarterly growth figures of 6.7 per cent, the Chinese government does not have to worry about full-year growth falling below 6.5 per cent. Instead, it can turn its attention to reining in some of the excesses that made this year’s better than expected growth figures possible.

On October 18, a day before the third-quarter GDP growth figure was released, central bank data showed that China’s broadest measure of credit, an aggregate figure referred to as total social financing, rose 11.3 per cent year-on-year in September to Rmb1.72tn. That was the highest September credit figure on record and well above expectations.

Of this amount, banks had issued new loans totalling Rmb1.2tn in September, with mortgages accounting for about half of the new lending as property prices continued to bubble over in a number of cities.

China’s stock of outstanding mortgages is now equivalent to almost 25 per cent of GDP, compared with just 15 per cent five years ago. Corporate lending also continued to surge, up more than 13 per cent in September.

But there are increasing signs that the Chinese government realises credit cannot continue to expand at twice the rate of the underlying economy indefinitely.

Earlier this month the State Council formally approved a debt-for-equity programme intended to relieve some of the financial strain on struggling companies, while more than 20 municipal governments introduced emergency measures to cool overheated property markets.

“In these cities, transactions will come down dramatically and prices will moderate,” says Zhu Haibin, chief China economist at JPMorgan in Hong Kong. More important is the outlook for new home starts, which in turn create demand for everything from concrete to steel. Mr Zhu predicts that nationwide home starts will decline next year, depriving the Chinese economy of one of its most important motors.

The property outlook is especially bad in heavy industrial regions that have been most affected by China’s economic slowdown. Jeremy Stevens at Standard Bank estimates that the three northeastern provinces of Liaoning, Jilin and Heilongjiang have six years of unsold housing inventory — or 25 per cent of the national total.

“Those [provinces] are deadweight,” Mr Stevens says. “Construction is not coming back there for a long time.”

Most analysts believe that the short-term consequence of a serious debt-reduction push by the government and a more sluggish real estate sector will be sharply lower growth in the fourth quarter and early next year — potentially below Beijing’s current comfort level of 6.5 per cent.

With a critical leadership transition due at the end of next year, sceptics suspect that the government will simply reopen the credit taps, starting the cycle all over again.

Government officials argue that their approach buys time for difficult structural reforms to take root and new economic growth engines to emerge. They may be proved right. But with economic growth continuing to ratchet down — 6.9 per cent in 2015, 6.7 per cent so far this year — they have less room for manoeuvre with each quarter that passes.

You must be logged in to post a comment Login