How badly is China’s economy doing? Look behind the official GDP figures
- Richard Harris says China’s economy is slowing, through no fault of Beijing’s. But when the authorities hold on to a wishful 6 per cent GDP figure, investors will make mistakes. Reliance on the ‘China model’ also won’t help trade talks with the US
In the flurry of New Year self-help articles on the Chinese economy, there is no end of advice for the leadership on what they “need to do”. Investors also “need” to look at what is actually possible, instead of making a dreamy wish list.
In September, I talked about China’s Lost Decade: the golden age of Chinese economic growth was in the noughties, which has been followed by a slowdown. By 2010, the low hanging fruit had been picked. More recent successes have been harder won, such as modernising China and largely eliminating poverty. These are no less proud achievements, though less boast-worthy.
There is an immutable rule in nature and economics. The bigger you are, the harder it is to grow. The dinosaurs tried and failed. There are verbal reports of Chinese academics calculating China’s 2018 economic growth at as low as 1.5 per cent, rather than the official 6.5 per cent. That seems too low to me but when I tested it among my China-based investment management buddies, it caused little surprise. After all, we have seen substantial declines in many of China’s economic indicators in the past year. That slow pace would put China behind the US, which overstimulated its own economy through big tax breaks.
The wisdom of crowds is more reliable in China when it comes to slow growth. The Shanghai Stock Exchange Composite Index was the world’s biggest loser in 2018, posting a fall of 24.6 per cent. Indeed, any analyst anywhere who still believes that China has a 6 per cent growth rate should be thoroughly ashamed of themselves.
The perfect storm of 2018 is not the authorities’ fault, it merely reflects the ebb and flow of economics. The Chinese authorities sought rationally to reduce overheating and chip away at one of the highest debt mountains in the world: 253 per cent of GDP. But who would have known this would coincide with the slowing of the big European export market and US President Donald Trump’s tariff tantrum?
One problem with the authorities holding on to a wishful 6 per cent GDP growth figure is that it gives us no real indication of when the economy may recover. Even more damaging is that, when the actual growth is finally reported, the size of the overall economy in dollar terms may turn out to be somewhat smaller than we think. Investors make enough schoolboy mistakes as it is without working with the wrong figures.
Zhang Weiying, professor of economics at Peking University, said in October that it was wrong to attribute decades of economic growth to the “China model” of one-party rule and state-driven capitalism. But Beijing has had a lot of success by playing a dominant role in the economy, and it will be almost impossible to wean policymakers off the model in the near future.
China is likely to stimulate its economy by cutting interest rates, further slashing banks’ reserve requirements and asking state-controlled banks to lend more. Yet, it is difficult to convince companies to borrow when they don’t need the money – it’s like pushing on a string. Infrastructure spending fell in 2018 and is unlikely to go back up; the big and easy projects have already been built.
Zhang also noted that the China model “inevitably leads to confrontation between China and the West”, a point underlining the importance of the trade talks. The Chinese and US economies mix like oil and water. The US’ small-government, free-market ethos is very different from the Chinese command-and-control model. China sees nothing wrong with giving significant financial and non-financial support to major companies, which it owns or controls. In the US, companies in trouble trade, merge or die – they don’t get state aid. Chinese and US attitudes to open trade, commercial law and privacy are diametrically opposed.
The trade talks are likely to result in a truce, not a solution. A deal is certainly possible if the optics look good enough for Trump’s 2020 presidential campaign. There are non-sensitive areas in which China can yield: forced technology transfers, food imports and foreign companies (relaxing the rules on foreign firms may also help long-suffering domestic private companies).
This will be a difficult year for the Chinese economy but there is one positive: the plunge in oil prices will offset some of the headwinds. And China will need all the fair economic weather it can get.
Richard Harris is chief executive of Port Shelter Investment and is a veteran investment manager, banker, writer and broadcaster, and financial expert witness