This post is going to be a large amalgamation of recent data. Bear with me.
The Current Growth Rate
China is growing at 6.7%. How is a country with rising debt burdens and low consumption managing to increase growth? China is increasing credit to prop failing businesses, exacerbating the imbalances inherit in its economic growth model.
In Q1, increases in total credit increased to CNY7.5tn, up 58% year on year and equivalent to 46.5% of nominal GDP. Credit growth in March accelerated to 15.8% year on year. Wei Yao from SocGen also wrote:
Considering also the record swap amount of CNY776bn local government debt into local government bonds, total credit to the non-financial sector actually increased nearly CNY3tn last month. The strength in non-bank credit came first and foremost from the corporate bond market. Net issuance there was a record CNY695bn in March.
Because consumption cannot adequately assuage local government’s need for growth, the federal government is pumping money into fixed assets and the least productive sectors of the economy.
The Least Productive
Before detailing who is benefiting from this stimulus as a sign of its inability to be continued, it is worth summarizing Chinese growth and common misconceptions. The Chinese economy benefited from extremely high growth rates, because credit flooded the economy. When China was underdeveloped this was a great thing, however it eventually led to over investment. Wealth from savers and consumers subsidized growth for fixed assets and producers through financial repression. Consider the loan to deposit ratios and SOE shares in selected provinces during the beginning of high investment/ growth period.
Loan to Deposit Ratio
Provinces 1988 1993
Jilin 1.9 1.9
Inner Mongolia 1.5 1.6
Heilongjiang 1.6 1.5
Fujian 1.2 1.0
Zhejiang 1.2 .9
Guandong 1.3 .8
SOE percentage shares (1993)
Industrial Output Value Industrial Employment
Jilin 75 100
Inner Mongolia 82 70
Heilongjiang 83 71
Fujian 40 42
Zhejiang 31 28
Guandong 34 32
Private industry, the most productive part of the economy, subsidized state directed investment. Much of this investment went into sectors that relied on high credit growth, commodities- more on this later.
This is important because much of this money went into poor areas. Heilongjiang is not a bastion of free enterprise and productive economic assets. Indeed these poorer areas that received state directed investment and had loose credit controls are in outright recession. This is in spite of the fact that capital stock for this area is relatively low. You can read more about China’s capital stock here, however I can provide a quick summary of Chinese economic discussion, particularly China’s capital stock ratio, in 2012. Many people thought that China wasn’t over invested because its capital stock ratio was lower than the United States. Put another way, “They didn’t spend too much because they haven’t completed their spending plan!”
The least productive parts of the Chinese economy are receiving this Q1 stimulus. Look at the following graphs from Christopher Balding (you can download the original PDF here):
I hope you can take a minute to look at his full PDF. It is interesting to note how low operating rates are, and it is equally interesting to note to that during a time of rising debt and low operating rates, increased credit is causing a sizeable uptick in Chinese PMI- as seen below.
I am in no way faulting the party. Read this post from FT Alphaville to see the stress the federal government must be under. Rural provinces are in recession- see charts below:
The conclusion is this: the Chinese economy, particularly the inefficient rural provinces that ‘benefited’ from financial repression and loose credit, are struggling. To keep social balance the central government loosened credit. Although this may increase headline data, it only worsens the imbalances inherit in the Chinese growth model.
I work in 国贸(Guomao) in Beijing. Guomao is meticulously groomed; every season has new flowers and trees. The flower beds were updated last week. The flower beds now look like this (please excuse my poor phone camera quality):
I’m sure it’s a sign, but I can’t put it together: something about selfie fodder and wasted money.
Beijing isn’t grey today.