An emerging consensus is questioning China’s ability to sustain its growth rate even at the scaled-down medium-targets of about 7%. Looking at the international environment and China’s home-grown problems, analysts and China observers are increasingly convinced that past excesses and distortions will catch up sooner than later to pull down growth sharply—way below the new normal accepted by its leaders. Differences range within this overall readings: a protracted, soft-landing versus a ‘crash-landing’; how soon this could happen; and the range of possible policy responses authorities could employ to avert this slowdown in order to adhere to growth targets or to navigate towards a ‘soft’ landing instead. There is general unanimity about a sharp slowdown ‘outcome’ ultimately as also that macro policy measures will not succeed in propping an unsustainable growth pattern beyond the short-term.
Well-founded as this narrative is, is it possible that China defies these views and continues to grow at around 7% ahead? It has after all, on past occasions, overturned entrenched beliefs and displayed a capacity to surprise. Combined with the fact that despite all we know about the Chinese economy, there is only so much we know and much more that we don’t really know, can an inevitable slowdown of the Chinese economy be taken as a certainty?
At 7.3% in the most recent quarter, China’s growth was the slowest since 2009. It was growing at nearly 10% as recently as 2011. GDP growth dropped steeply to 7.7% in the next two years thereafter, while this year’s of 7.5% is looking increasingly hard to achieve to most. Looking at the high costs at which even these scaled-down growth rates are being extracted by Chinese authorities, many are now predicting the country will slow down very sharply to much lower levels—around 5% in the medium-term, or even lower perhaps—as potential growth declines.
Views about China’s future economic performance are predicated upon two broad strands. The first is the apparent difficulty Chinese authorities seem to be having in rebalancing from fixed-investment creation towards higher consumption. Post-crisis, China sought to ward off the export collapse by removing credit controls and injecting easy money that was invested in property and caused a record construction boom.
The property bubble began to deflate at the start of this year: sales and prices have slumped; there is extensive oversupply in the housing market with secondary effects upon steel and related industries, all of which have combined to drag down growth. A host of selective monetary measures, viz reduced reserve requirements for some banks, direct loan injections to big banks—totaling 500 billion renminbi (Rmb)—and medium-sized lenders (200 billion Rmb), relaxing enforcement of loan-to-deposit ratio rules to ease bank lending, etc, have been employed by the central bank this year. On its part, the government has accelerated the construction of railways and public housing projects and allowed local governments to relax property controls, amongst other things. Despite this, demand for loans is reported to be declining; manufacturers are getting pessimistic as a fragile external economy slows down trade; export growth moderated in the last two months; while lead indications signal further weakness in the short term, increasing the likelihood of missing trade growth targets for the third consecutive year.
The second or a parallel reason for the ‘inevitable Chinese slowdown’ view is the visibly mounting evidence of leverage-induced stress. Total debt as share of GDP has jumped more than 100 points from 2009 to a 250% range according to several estimates—unsustainable by historical or any other standards; the indebtedness is spread across households, corporate, financial institutions and government; bad loans, defaults and bankruptcies are observably on the rise, as are falling profits and over-capacities in many segments. That growth is slowing despite all the monetary and other stimuli, a faster growth in credit over that of GDP, and investment growth is sustained in most segments including real estate despite declining sales lends credence to the ‘unsustainability and hence sharp slowdown’ view.
The emerging views, therefore, are that China’s growth has to slow down significantly as these excesses wear off, the economy regains health and reforms for a more maintainable reorientation towards a consumption-based model are implemented. In this process, investments across housing and industry will be impacted as credit-GDP growth slows; this will adversely affect consumption demand in turn; while the proposed financial sector reforms to lift caps on bank deposit rates, for instance, will cause interest rates to rise and negatively affect lending. A range of possible policy responses on the part of Chinese policymakers to contain the effects upon consumption and employment are also being considered: Inter alia, these include weakening the renminbi to retain competitiveness, especially in the light of its strengthening as the yen and euro lose value, lowering interest rates to boost demand, and delaying financial sector reforms.
Despite this overwhelmingly convincing evidence, can the possibility that China may still ride out these difficulties and stick to its avowed growth targets be excluded? The Chinese premier said very recently that the risks to its economy are not all that ‘scary’. And for long Chinese data has aroused suspicion. Besides the usual scepticism about the accuracy of official data, looking at the slides in cement, steel and electricity production, misreading could arise from other gaps; for example, fake invoicing that is often suspected to inflate Chinese exports; misgiving about the 1.08% official bad-loan rate for commercial banks considering that banks are believed to disguise the actual extent of delinquencies by rolling over or extending loans; declining sales reported by multinational firms against more robust official retail data; and so on. This increases the likelihood of misled understanding about the actual state of the Chinese economy and any hidden aces up the leadership’s sleeve. As in the past, China could yet again surprise and overturn current beliefs about the inevitability of a sharp slowdown. Interesting times lie ahead as we witness the battle of China views against the eventual, actual outcome.
The author is a New Delhi-based macroeconomist