China does its bit to calm worries about the world economy
A RUNNER cannot sprint all the time, noted Sheng Laiyun of China’s National Bureau of Statistics, after the release of China’s new growth figures on July 13th; he must pace himself so that he can run better later. Over the past four quarters China’s economy has recorded what runners call “even splits”, keeping a steady pace, lap after lap. It grew by 9.5% in the second quarter (year on year), having grown at a similar rate in the previous three.
The figures helped allay fears of a hard landing for China’s economy. But they raised some doubts about whether the economy is landing at all. Consumer prices rose by 6.4%. in the year to June. The economy’s pace may be steady. But is it too fast to sustain?
China’s macroeconomists, if not its consumers, can take some comfort from the nature of the inflation. Two-thirds of it was due to food prices, and much of that was due to pork. Farmers responded to low pork prices last year by breeding fewer pigs, some of which have since fallen victim to porcine diarrhoea. That pushed up prices by 11.4% in June alone, an annualised rate of 265%. This has played havoc with many economists’ inflation forecasts. “Perhaps I should have become a veterinarian,” says Andy Rothman of CLSA.
The source of China’s growth is more worrying than its speed. According to Mark Williams of Capital Economics, investment comprised 62% of the economy’s expansion in the second quarter, its biggest contribution for 18 months. Investment in fixed assets, such as buildings, factories and equipment, has grown by between 21% and 26%, year on year, for the past four quarters, despite the government’s efforts to tighten credit. This resilience may be because so much investment is carried out by state-owned firms, which are at the top of the pecking order when banks make loans. It may also be a sign that financing is not as tight as the hawks would like.
On the face of it, banks are feeling the pinch, charging each other high rates in the interbank lending market. They made new loans worth 634 billion yuan ($98 billion) in June, typically a strong month for lending. This puts them on course to add less than 7.5 trillion yuan to their loan books this year, according to Peng Wensheng of China International Capital Corporation.
But other analysts think financial conditions are looser than they appear. The central bank publishes a broader measure of “social financing”, which includes corporate bonds and some loans repackaged by “trust” companies. By this measure, financing could reach 14.5 trillion yuan this year, according to Fitch, a ratings agency. Even that total may be too low. Fitch believes a better measure of financing—which includes letters of credit loans from Hong Kong and more of the credit from trust companies and similar firms —could exceed 18 trillion yuan this year. That would take China’s stock of financing to 185% of GDP, up from 124% in 2007. ‘
Yet China seems to be getting less bang for its financial buck. In 2007, Fitch reckons, it took 1.28 yuan of extra financing to produce an additional yuan of GDP. Now it takes 2.38. China’s growth may be remarkably even. But its financial system is having to pump harder to maintain the pace.