Impressive Chinese growth despite tightening
In the past years, respectable economists have predicted nightmare scenarios for China. But after the first quarter, Beijing may be in the position to achieve its growth target, even while tightening. What’s going on?
WITH President Duterte’s rebalancing of Philippine’s economic ties with China, the latter’s growth prospects have increasing importance to Filipinos, through trade, investment, assistance, and regional spillovers.
In the first quarter, China’s economy grew 6.9 percent, slightly faster than expected. Retail sales soared to 10.9 percent on year-to-year basis, which reflects steady progression in the ongoing rebalancing of the Chinese economy toward consumption. Overall, growth was driven by recent gains in wage and credit growth, despite declining subsidies on car demand.
However, growth was also fueled by heavy use of steel in construction. Indeed, efforts to resolve the steel overcapacity crisis are likely to strengthen with political consolidation after the 19th National Congress of the Communist Party in the fall.
Investment in electronics factories rose as demand strengthened in foreign markets, while recovery of foreign markets reflects more positive international prospects. Yet, such prospects could be undermined by a broad array of forces, including “America First” protectionism, turmoil in Europe, geopolitics, refugee crises, and terrorism.
Can Chinese growth be sustained?
Growth deceleration, not hard landing
For years, some observers have claimed that China is heading to or amid a crash. Yet, the big picture is more complex.
In the early 2010s, developers pushed scale with massive expansion into lower-tier Chinese cities to benefit from the strong market momentum. But after they overshot, they returned to first- and second-tier cities.
Afterwards, regulatory measures to cool the market contributed to the severe 7.8 percent contraction in property sales in 2014. Following consolidation and adjustment, the sector began to recover, although developers continue to cope with huge property inventory.
Nevertheless, some observers have outlined far darker outcomes. Last August, Harvard economist Kenneth Rogoff claimed that the Chinese economy was amid a “hard landing.” While these views were reported as news internationally, realities proved different, again.
At the time, I argued that if China truly was amid hard landing, the latter should be accompanied by central bank rate hikes to slow growth. But in the past, the People’s Bank of China (PBOC) has been cutting rates down. It was only last October that PBOC signaled it was no longer willing to provide limitless cheap funds. Accordingly, the policy rate is 1.5 percent and likely to prevail in the foreseeable future.
A true hard landing would also imply rising inflation. Yet, in 2015-2017, Chinese inflation is expected to vary around 2-2.5 percent. Third, hard landing is predicated on a business cycle, whereas China’s lower growth is predicated on its structural rebalancing. Finally, a true hard landing indicates slowdown or recession, whereas Chinese growth is close to 6.5 percent or more, on an annual basis; that is, three to four times faster than in advanced economies. In brief, the hard landing scenario is not persuasive.
In the past, China’s credit target (13 percent) has been twice the nominal GDP, which has weakened the quality of growth. In March, policymakers cut the money supply growth target to 12 percent, yet credit growth accelerated.
Cyclical pressures, secular challenges
In the first quarter, industrial production climbed to 7.6 percent on an annual basis, which was supported by government infrastructure investment, including state-owned enterprises (SOE) and property markets. Nevertheless, Chinese real estate is likely to face greater tightening in the future.
During the ongoing year, China is seeking to balance between stability and progress. If efforts at SOE reforms and reducing overcapacity move ahead too fast, stability will be impaired. Conversely, if these efforts are too slow, progress would be endangered. The balancing act will benefit both China and the regional neighborhood, including the Philippines.
In the coming months, Chinese growth prospects will be fueled by strengthening fundamentals domestically and internationally. Yet, the PBOC must remain vigilant, due to the risk of inflation. Leading indicators, particularly the producer price index (PPI), are expected to rise, and as inflation tends to emulate the PPI over time, the PBOC’s tighter stance is warranted, even if food prices are under control.
Internationally, capital outflows have stabilized along with solid growth. Last year, China used $320 billion worth of foreign reserves to defend its currency and to contain outflows. By March, those reserves had increased for a second consecutive month. Interestingly, China is now estimated to have allocated a third of its reserves into non-dollar assets. So, after the March Fed hike, US dollar’s softness may have lifted the value of these reserves .
Nevertheless, the Chinese economy must still cope with likely adverse implications from the Fed’s expected two more rate hikes and possibly the Trump tax reforms and consequent shifts in capital flows. And while the first Trump-Xi summit managed to contain many potentially adverse prospects—including new trade protectionism, currency friction and regional tensions—all of these forces could be re-ignited by potential deterioration of bilateral ties.
In 2016, China’s actual growth was 6.7 percent. The current target for 2017 is “around 6.5 percent.” What the strong first quarter performance does make possible is a more decisive shift to fiscal and monetary tightening in the second half of the year, while keeping the current growth target intact. And that will allow Beijing to continue to balance cyclical pressures with secular objectives—the rebalancing of Chinese economy toward innovation and consumption.
Dr Dan Steinbock is the founder of the Difference Group and has served as the research director at the India, China, and America Institute (USA) and a visiting fellow at the Shanghai Institutes for International Studies (China) and the EU Center (Singapore). For more, see http://www.differencegroup.net/