The good news about China hidden by lousy official data
If analysts' studies are anything to go by, then China's economy is a lot healthier, driven by robust consumer spending rather than easy credit
Yesterday Monitor examined mounting fears that Beijing has repeated economic-policy mistakes made by the United States in the early years of the century and that the rapid credit expansion of recent years poses a threat to China's future growth.
Happily, there are some powerful reasons to hope that the outlook may not be as black as the pessimists paint it.
The bears argue that China has become addicted to easy credit to fund the high investment that fuels the country's growth.
Unfortunately, because of the resulting build-up of excess capacity, returns on capital are declining, which means the economy needs ever more investment to support the same rate of growth. That's clearly an unsustainable trajectory.
But while there is some evidence to back this view, it fails to take into account that China's economy is full of dichotomies.
On the one hand, there is the state sector: cosseted by the government, granted access to endless cheap loans and encouraged to invest regardless of project profitability.
On the other, there is China's legion of private enterprises, which battle to survive in a fiercely competitive market, starved of credit and excluded from many of the country's most lucrative sectors.
As a result, the state sector is bloated and inefficient. Leverage levels have shot up over the past five years, while returns on equity among state-owned industrial companies have fallen from 15 to 12 per cent.
In contrast, private-sector leverage has declined while returns on equity have edged up to more than 20 per cent.
In other words, China's economy is made up of an ailing state sector and a private sector that enjoys robust health.
That's encouraging, because reforms that stripped state companies of their protections and levelled the playing field between the state and private sectors would massively boost efficiency and productivity, helping to drive future growth despite the build-up of credit.
The benefits to be gained by closing the state-private divide are not the only reasons to be optimistic about China's economy. There is also the historical accident, which means that while investment and industry are minutely scrutinised by Beijing's data gatherers, household consumption and activity in the service sector go massively under-reported.
According to official data, investment makes up almost half of China's gross domestic product, while consumer spending contributes little more than a third, an imbalance unprecedented in history.
But the official surveys are notoriously bad at capturing household spending in fast-developing sectors like tourism, health and financial services.
In a study published last month, Jonathan Garner at Morgan Stanley estimated Chinese consumers spent 3,100 yuan (HK$3,826) each on recreation and education last year, not 1,240 yuan as official figures suggest. Similarly, they spent three times more on financial services than government data shows, and 3-1/2 times as much on big-ticket items like cars.
In total, Garner believes household spending last year was closer to 28 trillion yuan than the 18 trillion yuan that appeared in the government statistics. As a result, he estimates consumer spending grew to 46 per cent of GDP last year, while investment was flat at 41 per cent.
That's still unbalanced by international standards, but it's not similar to the ratios seen in other Asian economies during their investment booms.
It also means China's debt-to-GDP level is 183 per cent - a good deal healthier than the 219 per cent official figures imply.
If his estimates are accurate - and other studies support his conclusions - then China's economy is a lot less dependent on credit, and its growth a good deal more robust, than the pessimists would have us believe.