Boom or bust? The big debate raging over China’s economic future
S&P’s downgrade of the mainland’s credit rating casts a shadow over Beijing’s rosy growth picture
Everything was not only under control, China’s 6.9 per cent growth in the first half was of higher quality and efficiency, the country’s powerful economic planning agency insisted at length on Thursday.
The economy was balancing out, with services and domestic demand taking over some of the growth slack from industrial production and exports, the National Development and Reform Commission said.
But just hours later S&P Global Ratings downgraded China’s sovereign rating for the first time since 1999, citing the country’s greater economic and financial risks.
After “a prolonged period of strong credit growth”, S&P said, China’s credit growth in the next two to three years “will remain at levels that will increase financial risks gradually”.
The contrast reignited debate over the fundamentals of China’s future – whether the country is leaping over the middle-income trap with a leaner and more sustainable growth model or whether it is on a debt-fuelled path to disaster.
The clash of opinions could not have come at a worse time for the leadership in Beijing. The country’s political elite have been trying to paint a rosy picture of the economy ahead of next month’s five-yearly Communist Party congress, putting the dark days of the last two years’ stock market rout and exodus of funds behind them.
This year’s better-than-expected growth performance had boosted the leaders’ confidence in themselves as economic managers. Last week Premier Li Keqiang told the heads of six multilateral agencies, including the World Bank and International Monetary Fund, that China’s economy had improved and its debt level was “under control”.
The NDRC chimed in. “Market confidence has been rising,” the agency said. “The economic recovery is of high quality.”
And then S&P downgraded China’s sovereign rating, from AA- to A+.
The Ministry of Finance leapt into the fray, accusing S&P of misreading China and ignoring its sound fundamentals and growth potential.
The Chinese government said conditions were turning from good to better.
Much of the dispute centres on whether China’s 6.9 per cent growth this year – lifted by property and exports – means the country has entered a new boom cycle.
A year ago, in the depths of the financial turmoil, an unidentified “authoritative figure” – believed by many to be Liu He, top economic aide to President Xi Jinping – forecast in People’s Daily that China was headed in the long haul on an L-shaped trajectory. The suggestion was that there would not be any strong rebound in national growth any time soon.
Lu Zhengwei, chief economist with Industrial Bank in Shanghai, said the L-shaped outlook still held.
“The slowdown has been stabilising, supported by a resilient property sector and a recovery in external demand. But the economy is still in a L-shape trajectory,” Lu said.
Much of China’s economic growth has been buoyed by its red-hot property sector, particularly in smaller cities where the authorities have given displaced shantytown residents cash subsidies to get into the housing market. According to UBS, about 18 per cent of total residential sales in 2016 were supported by such schemes. But this demand could fade once the money runs out, chipping away at growth.
Lu said exports, another growth engine, were also expected to lose steam after climbing 13 per cent in the first eight months, especially with trade conflicts with the US looming on the horizon.
Larry Hu, chief China economist of Macquarie Securities, said exports were helped by the depreciation of the yuan last year but the Chinese currency had gained about 6 per cent against the US dollar this year, dragging on the sector.
“The currency appreciation will dent exports in [the next] six months,” Hu said.
But Renmin University finance professor Zhao Xijun said there were economic bright spots that could propel China to the next level of development.
“China is on the way to creating some new growth engines, with signs of breakthroughs in the manufacturing of hi-tech aviation and aerospace products, satellites and other communications equipment,” Zhao said.