Andy Xie

Opinion | China isn’t looking to grow its economy but, rather, is waiting for it to recover. Good luck with that

Andy Xie says Beijing’s stimulus measures are not meant to revive economic growth but only to maintain stability. China seems to think it can wait for good growth numbers to return, like the last time. But this strategy won’t work this time

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Andy Xie

Published: 2:00am, 21 Jan 2019Updated: 3:06pm, 21 Jan 2019

China’s economy is sailing into strong headwinds in 2019. As household debt mounted, the property market turned downwards last year and auto sales fell for the first time in at least two decades. Property and car sales account for one-fifth of China’s gross domestic product. Although China’s foreign trade rose by 10 per cent last year, its growth rate will slip this year as the global economy softens and the United States’ trade war with China begins to bite. As exports also account for one-fifth of GDP, any slowdown there would hurt the economy. Obviously, with all this negative news, investment will also cool.

To stimulate the economy, Beijing is cutting banks’ reserve requirement ratios and launching infrastructure initiatives. Neither is likely to revive growth. Chinese debt, unofficially 300 per cent of GDP, is too high for any debt-led growth policy to be effective. Currently, infrastructure spending is around one-fifth of GDP. It is hard to see how a few projects can move the needle. It appears the government’s goal is stability, especially in the financial system and the labour market, not growth. As the property market tips over, loan repayments become more sporadic. The goal of the monetary policy is probably to keep lending institutions liquid. This policy could be undermined only by massive capital flight. But as long as the Great Wall of capital control is solid, China will remain stable for the foreseeable future.

However, a growth recession, an unpleasant by-product of the muddled strategy, may last for many years. The property bubble has been around for about 12 years. Excesses of debt and inventory are enormous and would take a long time to digest. Residential properties under construction add up to close to six billion square metres, an inventory that would have taken about four years to digest at the peak of the bubble and would take many more years in a cooling market. In addition, tens of millions of properties could have been held for speculation. When they, too, are put on the market, the inventory overhang might stick around for a decade or longer. How much it would drag on growth is easy to imagine.

Growth and development are not identical. China invests about half of its GDP. Even if the economy doesn’t grow, there will be a lot more assets on the ground in 10 years. People who go back to visit a decade later would see a very different country. This is why stagnation may not be a bad choice for the government.

A woman works at a construction site for a residential skyscraper in Shanghai. Residential properties under construction in China add up to close to six billion square metres. Photo: AFP

As long as there are lots of assets, China could increase the size of the economy with the right reforms. It is just that the right reforms are not politically desirable for the foreseeable future.