Fears are mounting over the strength of China’s investment-led economy amid wild extremes of often conflicting data as it slows.
Topline forecasts appear to show an economy decelerating gently, with the Chinese Academy of Social Sciences this week tipping GDP to swell by 7.4% this year.
But others fret that with investment and output slowing — exports fell 6.6% in March year on year, with imports plunging nearly 12% — China is failing to replace an investment-heavy growth model with one based on domestic consumption.
“With both exports and investment looking weaker, and no sign of a significant pick up in consumption, it is difficult to see where growth will come from,” Craig Botham, emerging markets economist at Schroders, told Emerging Markets.
He warned that growth could temporarily dip below 7% this year — the minimum deemed necessary to create enough new jobs to ensure social stability, and a level that could prompt the state to inject more stimulus money into the economy, ranging from urban gentrification to high-speed rail lines.
Wildly contradictory Chinese data have long baffled economists. The industrial province of Hebei posted annualised first quarter growth rate of just 4.2%, suggesting a broad contraction across the manufacturing sector. Yet the latest International Comparison Programme survey, also issued this week, said the mainland economy would become the world’s largest by the end of 2014, as measured by purchasing-power parity, overtaking the US, a fact that discomfited Chinese leaders fretful of dominating world affairs.
But Chinese authorities may have bigger fish to fry. With state-owned firms “up to their ears in debt” and struggling to refinance or roll over loans, allied to wider problems of rising capital outflows, an out-of-control shadow finance sector, and a depreciating currency, it has become “increasingly difficult to imagine a scenario where a credit crisis or a drastic slowdown can be avoided”, according to Maarten-Jan Bakkum, senior emerging markets strategist at ING Investment Management. Bakkum warned of the “massive implications” on investment portfolios of a “Chinese crisis”.
WORRYING COOLING
Further evidence of rapid cooling emerged this week, with house prices rising 6.9% year on year in April, the sixth straight month of slowing price increases in what was one of the economy’s few bright spots. Wang Qinwei, chief China economist at Capital Economics, said the figures were “worrying” and “likely to weigh heavily on the economy”.
But by far the biggest challenge remains ahead for the authorities in China, who desperately need to convince 1.35 billion people to spend more. “China needs to go from an economy driven by development to one driven by consumption, and for that you need a completely new economic model, involving financial deregulation, and allowing households access to the capital markets. That cannot happen overnight, ” said Paul Sheard, chief economist at Standard & Poor’s.
But he expressed himself surprised at China’s inability to at least begin rebooting its economy. State media might be filled with bullish anecdotes about people spending more but, noted Sheard, “despite all the talk about rebalancing, you don’t see it showing up in the statistics yet”.
China’s dilemma is clear here. Rebalancing raises the likelihood of credit-driven booms and assets bubbles, and risks Chinese leaders losing control of the economy, but doing nothing is equally unpalatable.
“The current investment model won’t last forever, can’t last forever,” said Sheard.