Vertiginous levels of debt, industrial overcapacity, slowing growth and deflation: it has seldom been easier to spin a bearish yarn out of China’s economic data. In any fully developed economy this combination would augur an asset price bust or, at best, a spell of extreme volatility.
Either may come to pass: for the first time in decades, capital is leaving the country, and the stock exchange is performing a passable impression of a market in the grip of late-stage mania.
But China is also a place where normal rules of thumb do not apply. Uniquely for an economy in its position — the largest as well as one of the fastest growing on the planet — its leadership has consciously planned for a transition towards a different growth model.
Weaning an economy this large from a lopsideddependence on investment was never going to be easy. China’s rulers have economic levers at hand, but knowing which ones to pull is hard.
At every tremor in the growth rate, there is pressure on the authorities to goose up demand. In the past, China’s first recourse has been to unleash credit, such as by leaning on local authorities to splurge on infrastructure or property. But decades of this has strewn debt across the land, much through 10,000 local government financing vehicles (LGFVs), which have total liabilitiesexceeding 40 per cent of gross domestic product.
The state recently eased up on demands that LGFVs repay their bank debt, and has just scrapped the loan-to-deposit cap imposed on banks. Such measures may free up lending conditions, but will prove more palliative than stimulating. Demand for credit is weak, and will not rebound any time soon: industry is suffering from overcapacity, and the LGFVs carry funding costs well above their return on assets. Non-performing loans are breaching new highs. Finance managers prefer to recover first before bingeing again.
Moreover, the challenge is not so much to fire up growth as to spark it where it has not previously been strong. Those sectors that drove China’s dizzying ascent — property, infrastructure, manufacturing — cannot sustainably carry the economy forward. The People’s Bank of China, never a champion of laissez faire, has made clear that it wants banks to divert credit to agriculture and small business — not normally huge drivers of heavy investment.
Against these China-specific challenges are some with a global flavour, notably incipient deflation. Falling prices have helped China hit its 7 per cent growth target despite historically weak demand in cash terms. It is nominal more than real aggregates that matter most to indebted companies, however; those in China now have revenues growing at just 0.7 per cent, no faster than in the trough of the 2008 financial crisis. This, again, is no auspicious backdrop for a rebound in investment.
All these factors suggest that China’s gradual shift from investment dependence is not set to reverse. The measures the authorities have taken to counter a slowdown are precautionary, but presage no change in strategy. New drivers of growth — smaller businesses, consumer spending and services — may struggle to rebound as fast as the old drivers retrench, but with unemployment at a 15-year low, there is a willingness to tolerate the distress this causes to places most reliant on the old model.
China’s flight on to a new growth path may prove turbulent, but there is as yet no reason to fear a hard landing. In fact, with more than 40 countries counting the Middle Kingdom as their top export partner, and Chinese imports decelerating, the bumpiest landing may await those beyond its borders.