China needs a new growth model to wean itself off property market highs
Andy Xie says the government must develop demand-side support for the economy when the housing bubble is deflating, and nurture a growth cycle powered by productivity. This means a shift away from commerce to innovation
China’s bond yield topped 4 per cent last week, up by about 50 basis points in two months. That clearly reflects a tightening monetary stance. Meanwhile, China’s nominal gross domestic product growth rate accelerated to 11.2 per cent in the third quarter, from 7.8 per cent a year ago, almost entirely due to an increase in the GDP deflator – the broadest inflation gauge.
Monetary tightening is obviously justifiable. Yet, the small increase in interest rates has sent shock waves through the economy. For an economy with nominal GDP rising to 11 per cent, how could a 4 per cent bond yield or a 6 per cent bank lending rate be considered tight?
To be fair, there are new quantity restrictions, especially in the property sector, and the increase in credit in October was below the average in 2016. Still, the renminbi credit increase has averaged 20 per cent above last year’s. With so much credit pumped into the system already, why is there a feeling of tightening credit at this early stage?
The answer tells us why the Chinese economy is not in a normal state. Two related aspects explain why China’s economy is so liquidity-hungry.
The root cause of China’s financial fragility – according to its central bank chief
First, the economy is investment-led. That means pushing productive capacity to the maximum. It leads to a low return on capital and dependence on credit for expansion. It also means that the state sector that does most of the investing needs an ever-bigger share of liquidity in the economy to keep going. The most important tool for such monetary redistribution is the property bubble. By fuelling property speculation, the monetary growth is disproportionately allocated to the state sector.