China’s economic growth will stabilise – just not in 2018
Yu Yongding says optimistic growth forecasts for the Chinese economy overlook the degree to which slowing fixed-asset investment – though good for the long-term health of the economy – will affect near-term prospects, amid a host of financial risks
For the past decade or so, China’s economy has been on something of a roller-coaster ride. As 2018 begins, is the country approaching a new ascent, a steep drop, or something in between?
Prior to the global economic crisis a decade ago, the Chinese economy was growing at a breakneck pace. But when the crisis hit, the growth rate fell relatively sharply. Thanks to a 4 trillion yuan (HK$4.8 trillion) stimulus package, growth soon reached its trough and began to climb again.
Soon after, however, monetary tightening put growth back on a downward trajectory, spurring the government to introduce mini-stimulus packages in late 2011. This produced a moderate rebound, with growth again beginning to slide soon after. Finally, in 2016, growth began to stabilise again. The latest figures show that China’s economy grew by 6.8 per cent in the third quarter of 2017, leading many economists to offer rather optimistic forecasts for the coming year.
I am less sanguine. For decades, fixed-asset investment was the main driver of growth, accounting for almost half of total demand. Its share of China’s gross domestic product today exceeds 50 per cent, while investment calculated as residual capital formation accounts for some 45 per cent of GDP.
Yet, since late 2013, investment growth has been declining steadily. In the first three quarters of 2017, fixed-asset investment grew at an average rate of just 2.19 per cent year on year. In the third quarter, investment growth was actually negative, at minus 1.1 per cent. China has not seen such lows in decades.
From the perspective of structural adjustment, China’s declining dependence on fixed-asset investment should be hailed as an achievement. But it will be very difficult for China to sustain aggregate demand amid weakening investment growth.
Household consumption is unlikely to pick up the slack. In the first three quarters of 2017, private consumption grew by 5.9 per cent in real (inflation-adjusted) terms – down 0.5 percentage points from 2016. It is difficult to envisage a sudden surge in household consumption in 2018.
Growth in net exports, too, seems unlikely to offset declining investment, not least because US President Donald Trump leans towards protectionism in his dealings with China. And while China will probably continue to use fiscal policy to shore up demand, the extent to which it can do so will be constrained by factors like local governments’ debt burden.
China’s fixed-asset investment comprises three main categories: manufacturing, infrastructure and real estate. Manufacturing investment accounts for the largest share – 30 per cent. But it has been declining steadily since 2012, and is unlikely to pick up again.
Real-estate investment, meanwhile, has followed a cyclical pattern over the past two decades. Given the government’s determination to contain housing prices, there is little reason to expect that real-estate investment will rebound any time soon.
This leaves only infrastructure investment, whose share of total investment has been increasing since 2012. But infrastructure investment has already reached such a high level that continued growth could worsen resource allocation. Add to that fiscal constraints and stricter financial regulation, and a further expansion of infrastructure investment would be difficult, to say the least.
All of this leads to a simple conclusion: optimism about China’s economic growth in 2018 is not warranted. But this does not mean that China’s prospects are altogether dismal. If growth seems to be falling far below the 6.5 per cent target, the government will employ macroeconomic stabilisation tools, while working to prevent financial vulnerabilities from turning into systemic financial risks. More promising, the Chinese government’s ongoing efforts to cultivate innovation and implement structural reforms are likely to produce major returns in the long term.
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All of this suggests that China’s economic roller coaster is heading for another climb. Growth will eventually stabilise at a decent rate, but its passengers may have to wait a while.
Yu Yongding is a former director of the Institute of World Economics and Politics at the Chinese Academy of Social Sciences. Copyright: Project Syndicate