Two positive pieces on China’s economy

FT:

In 2007, premier Wen Jiabao argued rightly that “the biggest problem with China’s economy is that the growth is unstable, unbalanced, uncoordinated and unsustainable”. In that year, gross national savings were 50% of gross domestic product, up from 37 per cent in 2000. These huge savings financed domestic investment of 41% of GDP and a current account surplus of 9%.

Then came the global financial crisis. The Chinese authorities promptly realised that the current account surplus had become unsustainable. In the short run, the only way to avoid a slump was to expand investment further. In 2011, gross investment reached 48% of GDP and the current account surplus fell to 2%. But national savings remained at 50% of GDP.

This solution brought new problems. The first was a declining return on investment. The simplest way of showing this is via the incremental capital-output ratio (ICOR), which measures the amount of investment needed to generate a given increase in output. This has roughly doubled since 2007. The second problem is that the increased investment was driven by a huge rise in debt. According to the Institute of International Finance, gross debt rose from 171% to 295% of GDP between the fourth quarter of 2008 and the third quarter of 2017.

This is very high for an emerging country. Moreover, half of the increased debt went to non-financial corporate entities, which did much of the increased investment. A substantial portion of this increased debt may prove to be bad. Starting from the dramatic rise in the credit-dependence of growth, London-based Enodo Economics argues that the needed debt write-offs might ultimately amount to 20% of GDP.

The second problem is that the increased investment was driven by a huge rise in debt. According to the Institute of International Finance, gross debt rose from 171% to 295% of GDP between the fourth quarter of 2008 and the third quarter of 2017. This is very high for an emerging country. Moreover, half of the increased debt went to non-financial corporate entities, which did much of the increased investment. A substantial portion of this increased debt may prove to be bad. Starting from the dramatic rise in the credit-dependence of growth, London-based Enodo Economics argues that the needed debt write-offs might ultimately amount to 20% of GDP.

It is only because the household savings rate is still very high in China that private consumption is so low a share of GDP. As ageing takes hold, that is likely to change, possibly quite quickly. In brief, while the shifts are slow and the full adjustment to more reasonable levels could take until the middle of the next decade, we are seeing early signs of the necessary change in the structure of the Chinese economy towards one that is less unbalanced and, above all, one that is more reliant on the consumer demand of China’s vast population.

SCMP:

China’s Central Economic and Financial Affairs Commission convened for the first time on Monday with President Xi Jinping as the chair, marking the official start of a new command chain in running the world’s second biggest economy.

The new commission, which plays a similar role to the US National Economic Council, offers a permanent institution for Xi to drive through his economic policies, such as measures to defuse a debt bomb, analysts said.

The meeting, which was also attended by Premier Li Keqiang and Vice Premier Han Zheng, concluded that local governments and companies, especially state-owned enterprises, need to reduce their leverage ratio “as quickly as possible”.

Xi’s plan to centralise the decision-making powers of the party actually started five years ago, an article published by Xinhua over the weekend disclosed for the first time.

At the first meeting of the team convened by Xi on April 17 2013, he decided to change the role of the team from a consulting group to a “decision-making” one – an approach that would be different from the days of his predecessors of Hu Jintao and Jiang Zemin.

The 2013 meeting had been kept as a secret until last Saturday, as were the following four meetings of the leading group under Xi, which took place on a quarterly basis in July, September and December of 2013 and March 2014, covering issues of urbanisation, fiscal reform, water supply security and food supply security.

“Now everyone knows Xi is in absolute control, so if Xi said the priority is to cut leverage for China, we know China will do it.”

Progress seems to be happening now. Good. An improvement since we first noted the problem a dozen years ago.

Leave a Reply