Good News Is Bad News for China
On Monday, the Chinese government will once again try to convince the world its troubled economy is not that bad off after all. Third-quarter GDP data will be released, and whether the growth rate beats or misses consensus estimates, it's likely to be touted by the government as proof of the economy's continued resilience.
No doubt that'll help further calm investors, whose worst fears about China have ebbed recently. Overly bearish perceptions of China's economy have become "thoroughly divorced from facts on the ground," proclaims the latest China Beige Book study. In a survey conducted in October by Bank of America-Merrill Lynch, only 39 percent of fund managers queried considered China the biggest "tail risk," down significantly from 54 percent a month earlier.
Those investors shouldn't get too comfortable. The panic that roiled global stock and currency markets over the summer may well have been overblown. But the real risks to China's economic well-being are long-term, and they haven't diminished. In fact, the strong growth rates could be setting the stage for a harder landing later.
Even the regime agrees that China's economy is seriously flawed. Excess capacity is rampant in steel, cement and other industries. Debt has risen to astronomical levels. The growth model China used during its hyper-charged decades -- unleashing productivity by tossing its 1.3 billion poor workers into the global supply chain -- has lost steam as costs rise and the workforce ages.
How well is China tackling these problems? Not very. Debt continues to rise even as growth slows. IHS Global Insight estimates debt will increase to 254 percent of GDP in 2015, up from 248 percent last year. In all too many sick industries, zombie companies are being kept afloat by creditors and the government.
Deeper free-market reform is needed to spur entrepreneurship and innovation and better allocate financial resources to the most efficient companies. Yet despite much talk from President Xi Jinping and his Communist Party comrades, progress has been glacial. The government's new plan to improve the performance of bloated state enterprises is underwhelming. Authorities have done little to make the banking sector more commercially oriented or to open the economy to greater foreign competition or capital flows. The government's heavy-handed intervention to quell a mid-summer stock market swoon was rightly seen a step backwards.
Above all, the economy needs to "rebalance" away from its unhealthy reliance on investment -- which according to Goldman Sachs' Ha Jiming, totaled 46 percent of GDP last year, more than during Mao's disastrous Great Leap Forward. Government officials and some economists use top-line GDP data to claim consumption is playing a bigger role in the country's recent growth. Since investment has dropped off somewhat, that's probably true.
But that hardly means Chinese consumers have gone on a shopping binge. According to research outfit LMC Automotive, sales of passenger vehicles in China dropped by 1 percent in August from a year earlier, while consulting firm IDC recently forecast only 1.2 percent growth in 2015 for shipments of smartphones in China, down from nearly 20 percent in 2014. Nor is the government exactly helping matters: A long-awaited liberalization of interest rates on bank deposits remains incomplete, even though it could swiftly put more cash in the pockets of the average family.
Economist Christopher Balding has done some crack research pointing out that the service sector isn't expanding as quickly as the bulls believe. His figures also show that the "new economy" -- IT, retail, accommodation -- is making little headway against the "old economy" sectors such as construction, manufacturing and property. "The China rebalancing story still has many large hurdles of facts and strategy to overcome," he concludes.
Meanwhile, the government continues to find ways to bolster that old economy. Yet another round of debt-financed infrastructure spending is in the works. Beijing's ambitious Silk Road initiative to build roads, ports and railways throughout Asia and beyond is meant to be a bonanza for Chinese construction firms. All this may tamp down joblessness today, but at the cost of greater productivity and efficiency in the economy.
A reckoning could be unavoidable. The Conference Board figures that unless China presses ahead more aggressively with pro-market reforms, GDP growth could sink to 4 percent from 2020. That sharp a slowdown would spur widespread unemployment and destabilize debt-laden companies. So don’t worry so much about the data out of China today. Worry about what those numbers may look like five years from now.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
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