China’s economy on even keel, but choppy waters may lie ahead, say analysts
China’s economy looks safe and sound so far this year: a trade war with the United States has been avoided, the risks of a hard landing for the economy have fizzled away and even flows of capital out the country have ebbed with the nation’s foreign exchange reserves accumulating for two months in a row.
When China’s state statistics agency publishes a slew of economic indicators later this week, including headline GDP growth for the first quarter, the official data will probably paint a picture of stronger momentum underpinned by accelerated industrial production and investment.
Meanwhile, the world’s second-biggest economy keeps relying on its debt-fuelled growth model with the country’s total debt ratio to GDP showing no signs of decline despite Beijing’s repeated promises to “reduce leverage”. The share price plunges of a diary farm in northeast China have shed light on the risks of China’s debts. All the 40 billion yuan in debt incurred by Huishan Dairy looked healthy on paper until they steadily began to unravel.
Old questions are likely to resurface over whether China’s economy has moved away from the status of “unstable, unbalanced, uncoordinated and unsustainable”, in the words of former premier Wen Jiabao a decade ago, or has been led down a dangerous path of debt that will eventually lead to bust.
Debt risks cannot be overlooked this year, according to Yan Yan, the chairman of China Chengxin International Credit Rating, the country’s largest rating agency which has looked into thousands of bond issuers’ financial accounts.
As China’s monetary policy becomes less accommodative, a larger number of borrowers will find themselves in trouble, Yan said in an interview with the South China Morning Post at the end of March.
“The economy will continue recovering in the first half of this year, but may face downward pressure in the second half,” Yan said .
China’s curbs on house purchases and runaway property prices may later dampen real estate investment, he said. Property investment accounts for over a fifth of China’s total fixed-asset investment, the main engine of economic growth.
Over the longer term, China has to shift investment away from property into infrastructure and energy that can help economic efficiency, according to recent research by Standard & Poor’s.
“Investment in China needs to be rationalised and redeployed, not necessarily reduced, at least not drastically,” said Paul Gruenwald, Asia-Pacific chief economist at S&P Global Ratings. “This objective, in turn, requires changes in policies that allow the redeployed investment to be financed.”
Meanwhile, Chinese financial resources have kept flowing into the housing market. Over half of newly issued loans by China’s listed banks were mortgages last year, according to lenders’ annual reports. China Minsheng Banking said its property loans jumped 158.8 per cent in 2016 from 2015.
China’s growth target this year is 6.5 per cent, eyeing stable job creation, retiring overcapacity and lowering elevated corporate debt loads.
The Chinese leadership has also been particularly keen on managing financial risks as it prepares for a leadership change conference later this year.
One priority is trying to defuse the debt time bomb. For local government debt, Beijing has been giving quotas to local governments to sell long maturity bonds to “swap” for high-yield short-term debts, or a rollover. For corporate debts, China’s banking regulator has asked banks to form consortiums to share risks and to do rollovers. For big state-owned enterprises, debt-to-equity swaps were adopted to reduce debt burdens.
Yan, the chairman at China Chengxin, said the effect of these schemes was largely cosmetic.
“Debt-to-equity swap plans are very helpful to ease debt loads of big state firms, but just for now,” said Yan. “Only steady economic growth can lower the leverage.”
China has previously always managed to keep its growth on track in the past in face of stern challenges. In the years following the 1997 Asian financial crisis, China kicked start economic growth by privatising state enterprises, creating a domestic housing market and joining the World Trade Organisation. When the financial crisis hit China’s shores in 2008, China started a massive stimulus plan to bolster growth.
Beijing’s tradition of creating new growth engines is continuing. On April 1, the government announced an ambitious plan to create a new city, the Xiongan New Area in the backwater Hebei province, a move that could lift demand and business sentiment.
However, even with all the efforts to keep risks in check and headline growth numbers strong, some analysts said there were signs of sluggishness already.
Rafael Halpin, head of research with North Square Blue Oak, a China-focused investment bank in London, noted that the fall of new construction orders in the non-manufacturing purchasing managers’ index was “unusually” weak in March, a traditionally busy month for the start of new projects.
While it does not suggest a collapse in demand for industrial goods, it is a sign that “expectations of a continued acceleration in demand - that has fuelled the recent inventory build-up - are not justified,” Halpin wrote in research note.