Despite talk of reform, no sign of rebalancing in China's data

In contrast to Beijing's pledges, investment has played a bigger role in driving the economy while the share of private demand has diminished

PUBLISHED : Tuesday, 21 January, 2014, 1:05am
UPDATED : Tuesday, 21 January, 2014, 9:29am

Yesterday Beijing's top bean-counters announced that the mainland economy grew 7.7 per cent last year in inflation-adjusted terms.

That's the same growth rate as 2012. Concentrating on the data from the final months of last year, however, economists detected a modest slowdown during the last quarter.

They attributed this easing in activity to tighter credit conditions following a crackdown on shadow market lending. Almost all regarded it as a thoroughly good thing - evidence of Beijing's reform programme in action.

It’s likely the country’s economic mix will become still more distorted in 2014

Maybe. But it's now almost seven years since then premier Wen Jiabao declared the country's growth to be "unstable, unbalanced, unco-ordinated and unsustainable".

At the time, Wen pledged as a matter of urgency to engineer a shift away from the investment-led growth trajectory towards a more balanced model with a greater emphasis on private demand.

Since then, the economy has gone on to become even more distorted. Alas, there was little in the figures released yesterday to suggest that anything had changed in 2013.

Last year, investment was the biggest driver of growth, contributing 4.2 percentage points of the 7.7 per cent rise in gross domestic product.

In contrast, consumption - both by households and the government - made up a relatively meagre 3.9 percentage points (with net exports making a small negative contribution to growth).

That reverses the picture from 2011 and 2012, when the growth contribution of consumption edged ahead of investment for the first time in years.

As a result, we can be fairly sure that the mainland's overall economy - rather than just its growth mix - became even more unbalanced last year.

In 2012, fixed investment made up a record 46 per cent of total economic output, while household spending contributed just 36 per cent.

To put those proportions into perspective, in India fixed investment makes up roughly a third of GDP with private consumption weighing in at 60 per cent. In Hong Kong, private consumption comes in at 65 per cent, investment at 25 per cent.

In short, never before in history has the make-up of a major economy been so skewed towards large-scale investments and away from spending by ordinary households.

And the skew is getting even more extreme. According to the data released yesterday, the mainland's fixed-asset investment grew at a nominal 19.6 per cent rate last year.

Factor in that prices for investment goods in the country are actually in deflation, and that implies the real rate of fixed-asset investment growth was more like 21 per cent.

At the same time, retail sales grew 13.1 per cent in nominal terms. Adjusting for consumer inflation, that gives a real increase of a little over 10 per cent.

Admittedly, a headline figure for fixed-asset investment is not a great proxy for the fixed-investment component of GDP. For one thing it includes land sales, which shouldn't count towards capital formation.

Similarly, retail sales is an imperfect guide to consumer spending. They tend to be measured at the wholesale level and include at least some government procurement.

Even so, yesterday's figures showing that fixed-asset investment grew at roughly twice the pace of retail sales last year amount to powerful evidence that the role of investment in the mainland economy increased in 2013, while the share of consumer spending diminished.

In other words, despite all the new leadership's talk of reform and restructuring, the mainland economy became even more unbalanced in 2013.

And with officials pledging that growth will remain comfortably above 7 per cent this year, it's likely the country's economic mix will become still more distorted in 2014.