Is China’s economy on the brink of a new boom? Digging for answers in industrial numbers
A huge spike in sales of heavy construction machinery supports the idea that the good times are returning
After a slew of signs pointing to strong growth momentum, the question being asked about China’s economy has changed: from “Will it crash?” to “Is it about to take off?”
A spike in sales of construction equipment, along with improved profitability at industrial enterprises and a hefty surge in the prices of raw materials such as coal and steel, is fuelling the debate about whether China has entered a new boom cycle.
Ren Zeping, chief economist at Beijing-based Founder Securities and a former researcher for China’s cabinet, is a leading advocate of the “new cycle theory”.
In an article published last week on his social media account, Ren said China was at the start of a new boom cycle because its industrial oversupply problem had largely been resolved after years of deflation and capacity reduction.
The latest positive indicator came from the excavating machinery branch of the China Construction Machinery Association, which announced that sales of excavators in China in the first eight months of the year rose by a massive 111.1 per cent year on year to 85,766.
Such an expansion rate is unprecedented, surpassing even the 78 per cent growth recorded for the sector between 2009 and 2010 under a huge drive led by then premier Wen Jiabao to get the country building again. In that period, however, volume sales were significantly higher at 165,804 units.
In the past year, the share prices of steelmakers, coal miners and cement plants in Shanghai and Shenzhen have steadily outperformed the benchmark indexes.
Although aggregate demand for steel, coal, construction materials and non-ferrous industries had not expanded, the administrative restrictions on new capacity had resulted in sustained price rises and improved profitability for existing players, Ren said.
Other analysts, however, have questioned whether China’s growth is organic or just a result of government intervention.
Li Xunlei, chief economist at Zhongtai Securities and a deputy to the Shanghai People’s Congress, said China’s US$11 billion economy was still grappling with a mountain of debt and it was too early to say the positive signals were pointing to a boom cycle.
“China is in the middle of a financial deleveraging and economic transformation. A new boom cycle can’t start until that work is done,” he said.
“Industrial overcapacity still exists,” he added. “The investment-driven growth model has not changed and the recovery of industrial profits was largely down to a rise in producer prices rather than demand.”
Less than a year ago, economists feared the country might be a drain on global growth. But China’s GDP expanded by 6.9 per cent in the first half of this year, accelerating from 6.7 per cent in 2016.
China’s industrial profits in the first seven months rose 21.2 per cent from a year earlier, while profits at state-owned industrial enterprises surged 44.2 per cent in the same period, according to figures from the National Bureau of Statistics.
Wen Bin, chief economist at China Minsheng Banking Corp, said that while there was clear evidence of a “cyclical expansion” – given the rebound in the producer price index and expansion of manufacturing activity since 2016 – the manner of growth was old-fashioned, relying on real estate and infrastructure construction, and government orders to cut capacity.
“Traditional growth drivers have played a major role in the recovery,” he said.
China was in the middle of a long process of structural change, and in the long run its economic growth rate could fluctuate in the range of 6.5 to 7 per cent, Wen Bin said.
Raymond Yeung, chief greater China economist for ANZ Bank, said that what really mattered was whether China’s economic structure had substantially changed and if new growth drivers for the next five to 10 years had appeared.
“So far, there have been no such signs,” he said.