The accelerating investment that helped to drive a pickup in China’s economy last month shows how Communist Party officials have failed to shift the nation’s growth model, leaving a challenge for new leaders.
Fixed-asset investment rose 22.6 percent in September from a year earlier, up from 19.1 percent growth in August, Bank of America Corp. estimated after yesterday’s release of data for the first three quarters of 2012. Spending on projects from the government’s budget also accelerated in September. Industrial output and retail sales picked up last month even as the economy decelerated for the seventh straight quarter.
Faster investment approvals and increased railway spending show officials are using similar channels to support growth while being careful not to repeat the size of the stimulus response to the global financial crisis in 2008. Relying more on investment than consumption for expansion may exacerbate overcapacity and increase risks of a deeper slowdown later.
“Just because you have avoided a hard landing doesn’t change the fact that the growth model is unsustainable,” said Alistair Thornton, an economist in Beijing at IHS Global Insight. “We’re still relying on the old tools and that means far too much reliance on investment and not nearly enough reliance on consumption. It will take a huge amount of reform over the next few years to bring about the consumption-driven growth that China’s leaders aspire to have.”
Fixed-asset investment excluding rural households rose 20.5 percent in the first three quarters, up from 20.2 percent in the January-August period, data from the statistics bureau showed. Industrial production increased 9.2 percent in September from a year earlier, rebounding from a three-year low in August. Retail sales, which include government purchases, advanced by the most since March.
The pickup in factory-output growth was “driven by investment demand,” Lu Ting and Larry Hu, China economists at Bank of America in Hong Kong, said in a research note yesterday. Output of steel products last month rose 4.9 percent from a year earlier, more than triple the pace in August, while cement and crude oil output growth accelerated, the analysts wrote.
Yesterday’s data followed reports showing exports exceeded forecasts in September and money supply grew at the fastest pace in 15 months.
China’s benchmark Shanghai Composite Index advanced 1.2 percent yesterday, the most in a week.
China’s efforts to stimulate growth outside of investment are running into obstacles. While the central bank cut interest rates in June and July and allowed financial institutions to offer bigger discounts on loans, the nation’s biggest banks are resisting government pressure to lower borrowing costs as they seek to maintain profitability in operations, officials at the top four lenders said this month.
Coca-Cola Co., the world’s largest soft-drink maker, this week said volume sales growth in China of 2 percent in the third quarter trailed the 6 percent pace of the first three quarters combined. “It is reasonable to expect that China’s ongoing economic slowdown may have a short-term effect on our industry and on our business,” Chief Executive Officer Muhtar Kent said during a conference call.
Preventing any further slowdown is one of the chief challenges for the ruling Communist Party as it begins a once-a-decade leadership transition with a congress set to start Nov. 8 in Beijing, where Vice President Xi Jinping will probably become head of the party. At the annual session of the legislature in March, Xi will probably succeed Hu Jintao as president and Vice Premier Li Keqiang may succeed Premier Wen Jiabao.
China’s government won’t provide big economic stimulus and a strong rebound in growth is unlikely, Song Guoqing, an adviser to the People’s Bank of China, said in a speech in Beijing yesterday. Still, slowing inflation gives China’s central bank room for “tweaking” monetary policy, said Song, an academic member of the central bank’s monetary policy committee.
Even with the increase in investment, China may be undergoing a shift in its expansion. Jim O’Neill, chairman of Goldman Sachs Asset Management, said the bigger rise in retail sales relative to industrial production “is a rather good sign that China is rebalancing and adjusting to a better quality and more sustainable level of growth.”
China’s leadership is “highly wary about an aggressive investment-led stimulus, which explains why they have largely stood aside and undertaken only modest policy insurance amid the economic slowdown,” said Ramin Toloui, global co-head of emerging markets portfolio management in Singapore at Pacific Investment Management Co., which operates the world’s largest bond fund.
Even so, China’s investment-driven economy may persist through 2020, said Yin Jianfeng, an economist with the Chinese Academy of Social Sciences, a state-funded research institute in Beijing that advises the government.
“As long as there are reasonable returns and sufficient savings to sustain the investments, I don’t think China should try hard to encourage consumer spending,” Yin said. The nation can maintain an annual growth rate between 7.5 percent and 8.5 percent, he said.