Crash diet needed for China's binge spending
Andy Xie says China's government sector has become morbidly obese from its spending addiction. Its new leaders will need to consider a radical intervention to avoid a crisis
China's Communist Party has set in motion a generational leadership change, raising hopes for policy changes after the transition to revive the economy. Many people pin their hopes on another vast stimulus like the one of 2008. I doubt that would help. China's economic problems are structural and difficult to fix. To stabilise the situation, the new leaders must stop the government from growing.
Over the past decade, China's government has become obese, crowding out everyone else, and feeding the twin evils - corruption and speculation - that plague the economy. Government actions drive most economic activities, and they are mostly inefficient. The current economic downturn is a consequence of the massive capital misallocation due to government's excessive intervention in the economy. An attempt to revive the economy through more wasteful investment will push the country closer to financial crises and currency devaluation.
China must instead put the government on an emergency diet. Any stimulus must be made through tax cuts to boost household spending and alleviate the tax burden on private enterprises.
Last year, the government reported fiscal revenue that reached 22 per cent of gross domestic product; the figure came up to 35 per cent if government-managed social funds such as social security were added. The largely debt-funded fixed-asset investment by the government and state-owned enterprises reached 22 per cent of GDP; property sales, with most of the proceeds going to the government, 13 per cent of GDP; and land sales that all go to the government, 6 per cent. While these numbers overlap to some degree, they portray an economy in which the government dominates spending.
Net fund-raising, mostly for state-owned enterprises, property companies and local governments, is running at 30 per cent of GDP so far in the current year. Total reported corporate profit, though declining, is above 10 per cent of GDP. And fiscal revenue is rising faster than GDP.
But what has this large amount of fixed-asset investment achieved? Electricity production has grown by less than 4 per cent so far this year, compared with an average of 12 per cent per year for the past decade. Most retailers report revenues rising in the mid-single digits. Excluding inflation, that growth would be close to zero. Based on production data and corporate reports, China's economy seems to be barely growing.
Most local governments and state-owned enterprises blame policy tightening for the downturn. But the money available to them speaks otherwise. They feel that money is tight because their spending appetite has grown. Also, because most projects are not profitable, how can banks justify more loans?