SINGAPORE (Apr 22): As China posts yet another quarter of 6%-plus growth, analysts have been quick to brand the latest upswing as a rebound. Buoyed by this year’s double-digit stock-market gains, large flows of credit and tax cuts for consumers, Beijing is trying to sell the narrative that growth remains stable.
Some official statistics seem to support that theory: GDP grew an annualised 6.4% in 1Q2019 from a year earlier. Retail sales rose 8.7% and factory output climbed 8.5%.
Dig beneath the headline data, though, and we get another story. Beijing has been flooding the market with credit, with total social financing up 40% so far this year. Notably, the source of funds is expanding beyond banks, indicating an uptick in shadow activity. Yet, fixed-asset investment is up only 6% from last year. That means loans are not heading into areas that will boost the real economy. Meanwhile, companies are not getting paid what they are owed and account receivables are building up.
The consumer side does not look any better. Auto sales fell 11% in 1Q2019 from an already tepid 2018. Mobile-phone shipments slid 12% over the same period, compounding a 26% tumble a year earlier. Households are clearly feeling the pinch: They are ordering less takeout from delivery apps and seeing fewer movies at the box office. Shoppers are using their credit cards more, with balances up 23% in 4Q2018 from a year earlier. And while surveys show household expenditure rose nearly 15% in 2018, there is little left over in the budget for any extras. That helps explain why production of air conditioners was down 1% in the first two months of the year, while washing machine output dipped 7%.
Beijing has unveiled a standard buffet of fiscal stimulus, credit growth, debt restructuring and consumer-focused tax breaks to boost growth. It is debatable whether any of that will work. Public finance does not play out in a vacuum: A tax-cut recipient has the option of saving that money or spending it. Given high Chinese household debt levels, it is quite likely that windfall will have a much smaller impact on consumption than hoped. The same thinking applies to firms and local governments.
The more pressing question might be how much new credit is flowing into financial markets, given the rise in stocks and commodities prices. A long history of credit binges is a reminder that Beijing could end up spending a lot of money to accomplish very little.
With total inflation running at around 1%, compared with 2.9% at end-2018, the drop-off in nominal growth is going to push economy-wide leverage significantly higher in 2019. While Beijing has abandoned specific growth targets, it still aims for a range — and even that may not be feasible. Trying to maintain 6%-plus real growth in an economy already saddled with debt and excess capacity, one that can no longer depend on current account surpluses of 2% to 3%, is simply unrealistic. More than anything, Beijing may need to reset its own expectations.
Christopher Balding is an associate professor of business and economics at the HSBC Business School in Shenzhen and author of Sovereign Wealth Funds: The New Intersection of Money and Power.
