Tag Archives: GDP growth

World Bank Holds Its Growth Outlook For China Unchanged

THE WORLD BANK has left its growth forecasts for China to 2019 unchanged from its projections published last June. In the latest edition of its Global Economic Prospects, the Bank reiterates its view that growth this year will slow to 6.5% from 2016’s 6.7%, and then slow further to 6.3% in both next year and 2019.

The Bank takes note, however, of “resurfacing concerns about buoyant property markets, as growth slows gradually toward more sustainable levels, with a rebalancing from manufacturing to services”.

There is little unexpected in the Bank’s sketch of the economy. Growth has been concentrated primarily in services, while industrial production has stabilized at moderate levels. Strong consumption growth highlights the internal rebalancing on the demand side. Investment growth has continued to moderate from its post-crisis peak, concentrated in the private sector; investment by the non-private sector accelerated in 2016.  Fiscal and credit-based stimulus to growth in 2016 focused on infrastructure investment and household credit.

china-economy-chartCredit growth remains well above the pace of nominal GDP growth, with loans to households accounting for an increasing share of credit extension in 2016 on the back of a continued real estate boom, especially in first-tier cities. The ratio of household debt to GDP has surpassed 40%, up almost 10 percentage points over the past three years. Meanwhile, the ratio of non-financial corporate sector debt to GDP reached 170% in 2016.

Producer price deflation came to halt as input prices stabilized. If the cycle has swung back to reflation, as an uptick in global commodity prices as well as recent producer price index numbers might indicate, that would be a significant turning point.

Capital outflows remained sizable last year and continued to put downward pressure on the currency. During 2016, the renminbi depreciated by about 5% in nominal trade-weighted terms (and some 7% against the US dollar) albeit broadly in line with fundamentals.

The renminbi was added to the basket of currencies that make up the International Monetary Fund’s Special Drawing Right in October last.

Soft external demand, heightened uncertainty about global trade prospects and slower private investment are the key risks to the growth outlook for this year. Macroeconomic policy is likely to remain supportive. Meanwhile,  rebalancing from industry to services and from investment to consumption is expected to moderate.

Progress in reducing financial excesses will likely be similarly modest, barring deep structural reforms to state-owned enterprises and corporate restructuring  — both highly unlikely in a year that will see a party plenum that will start to line up the next generation of top political leadership. No sharp policy changes will be implemented which would raise disruption risk, even though the longer it takes to tackle deleveraging the higher the eventual cost will be.

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Stabilised Growth Lets China’s Focus Switch To Deleveraging

GOVERNMENT STIMULUS KEPT GDP expanding at 6.7% for the first three quarters, as close to bang in the middle of the official target range of 6.5%-7% as makes no difference. The economy has stabilised and looks to be back on its glide path of steady but slowing growth. However, the cost has been a deceleration of the ‘rebalancing’ of the economy towards consumption-driven growth and an acceleration in the accumulation of debt, particularly corporate debt, and particularly the debt of state-owned enterprises with excess capacity and real estate.

It was state government infrastructure spending, not private investment that kept growth going in the third quarter. An uptick in the property market helped, too, though caution is advised here given there was a 34% surge in sales but a 19.4% fall in new construction starts in September year-on-year as central and provincial governments introduced measures to cool off the property market).

Overall, state fixed-asset investment grew 21.1% in the first nine months whereas private investment was up 2.5%. However, the slowing growth in private investment seems to have bottomed out in the middle of the year while state investment growth similarly appears to have topped out in the first half.

That state investment spending has been on tick. The IMF’s Financial Stability Report released earlier this month highlighted the rising gap between credit growth and GDP growth. Total debt is about 250% of GDP, with corporate debt equivalent to more than 100% of GDP.

It is not so much the size of the debt-to-GDP ratio that is a concern; the United States has a similar ratio, for example, and the eurozone’s is a bit higher at 270%. It is the pace at which China’s is growing that alarms. At the end of 2007, the year before the stimulus to counteract the global financial crisis was launched, the figure was only 147%.

History suggests that any economy that has experienced such a rapid pace of debt growth will be confronted by either a financial crisis (e.g., the United States) or a prolonged growth slowdown (e.g., Japan). It is just a massive challenge for an economy to deploy such volumes of capital productively over a short time. Either the projects available offer diminishing investment returns and more and more loans to fund them go bad; there are only so many bridges to nowhere that can be built. Or credit starts to dry up.

The interconnectedness between the banks and the government due to the centrality of the state-owned sector in the economy makes a crisis unlikely. The government is effectively creditor and debtor. Also, domestic savings, not flighty foreign capital funds the debt. There is plenty of liquidity in the financial system, the People’s Bank of China will readily supply more if needed, and capital controls are in place to check capital outflows should they start to happen on a significant scale.

That is not to say the risk is totally absent. The proliferation of shadow banking products, particularly those offered by the country’s small banks, remains a significant vulnerability that could test the resilience of the country’s capital buffers.

Nonetheless, Beijing’s challenge in managing down debt levels is to avoid the second consequence, prolonged slow growth, and to do it with one hand tied behind its back having set itself in 2010, the target of doubling GDP and per capita income by 2020.

Of late, supporting short-term growth has been given priority over deleveraging to ward off long-term financial risk. Now, that growth looks to have stabilised (and slowing GDP growth to below 8% has not brought the apocalypse of social unrest predicted in the double-digit growth days), the priorities are changing.

The IMF has long expressed concern at China’s debt levels and the perils that persist in the shadow banking system. It recommends corporate deleveraging and opening up of the state-dominated service sectors to private firms, along with a stronger governance regime and hard budget constraints on state-owned enterprises within the broader context of moving to a more market-based financial system.

New guidelines from the State Council allowing creditors to exchange debt for an ownership stake in a debtor company are likely only a first step in that direction.

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IMF Bangs On A Familiar But Necessary Refrain

THE INTERNATIONAL MONETARY Fund has left its growth forecasts for China this year and next unchanged at 6.6% and 6.2%. However, in the newly published edition of its World Economic Outlook, the IMF notes that “China’s growth stability owes much to macroeconomic stimulus measures that slow needed adjustments in both its real economy and financial sector”.

Policy support and opened credit taps stabilised growth in the first half of the year close to the middle of authorities’ target range of 6½% –7% for the full year.

The Fund bangs on a familiar drum when it calls for more decisive action in tackling corporate debt and governance issues in China’s state-owned enterprises (SOEs). Lack of progress on these, it says, raises the risk of a disruptive adjustment from reliance on investment, industry and exports to greater dependence on consumption and services. Rebalancing could become ‘bumpier than expected at times,” the Fund warns. The current short-term stimulus on which China is relying and a still-rising credit-to-GDP ratio exacerbate that concern.

Credit dependency is increasing “at a dangerous pace, intermediated through an increasingly opaque and complex financial sector”. A combination of factors are at work here: “the pursuit of unsustainably high growth targets, efforts to prop up unviable state-owned enterprises to preserve employment and defer loss recognition, and opportunistic lending by financial intermediaries in the belief that all debt is implicitly guaranteed by the government”.

The IMF’s policy prescriptions are similarly familiar:
• address the corporate debt problem by separating viable from unviable state-owned enterprises, harden budget constraints and improve governance in the former while shutting down the latter and absorbing the related welfare costs through targeted funds;
• apportion losses among creditors and recapitalise banks as needed;
• allow credit expansion to slow and accept the associated slower GDP growth;
• strengthen the financial system by closely monitoring credit quality and funding stability, including in the nonbank sector; continue to make progress toward an effectively floating exchange rate regime; and
• further improve data quality and transparency in communications.

The medium-term outlook for China remains clouded by the high stock of corporate debt—a large fraction of which is considered at risk. And vulnerabilities continue to accumulate with the economy’s rising dependence on credit, which complicates the difficult task of rebalancing the economy across multiple fronts:

The medium-term forecast assumes that the economy will continue to rebalance from investment to consumption and from industry to services, on the back of reforms to strengthen the social safety net and deregulation of the service sector. However, non-financial debt is expected to continue rising at an unsustainable pace, which—together with a growing misallocation of resources—casts a shadow over the outlook.

Spillovers from China’s rebalancing and gradual slowdown via global trade and increasingly financial channels continue to concern the Fund. These have been significant, and China’s growing global role, the Fund says,  makes it all the more important for it to address its internal imbalances.

However, it also notes the other side of the coin:

The outlook for emerging market and developing economies will continue to be shaped to a significant extent by market perceptions of China’s prospects for successfully restructuring and rebalancing its economy.

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Data doubts

Abacaus. By HB (Own work) Public domain, via Wikimedia Commons

THIS BYSTANDER HAS long not given undue credence to the case that China’s economic data misrepresent the real state of the economy — or at least they don’t misrepresent it any more than any other country’s data.

That assertion comes with a bunch of caveats, notably that counting the output of any economy is fiendishly difficult, and especially one as large as China’s. Also, as nations evolve from being manufacturing- to services-based, the task gets even more challenging.

The way the world counts GDP was designed for an industrial era where there were hard outputs to measure:  ingots of steel;  sacks of coal; trucks full of widgets. In a services-dominated economy, GDP, which is, after all, no more than the value of the output of goods and services, can be increased merely by having bankers raise their fees.

China has a track record of announcing GDP data closely aligned with official targets. It is reminiscent of the way the General Electric Corporation in the United States in days past used to report quarterly earnings bang in line with the guidance it had given stock analysts.

Smoothing earnings, that was called. State planners would appreciate the technique if anyone would.

China’s national GDP number is derived from data collected across the country and while the National Bureau of Statistics fields a team of more than 20,000 data collectors, they still need local assistance.  The importance, real and symbolic, that Beijing attaches to the overall GDP figure is an incentive for local officials and state-owned enterprises to bolster the numbers they furnish.

President Xi Jinping has set a national target of doubling output and income levels by 2020, goals that demand annual GDP growth to average 6.5%. Patriotic statistical duty becomes self-evident.

Longstanding readers may recall Prime Minister Li Keqiang once saying that the country’s GDP data was “man-made” and that measures such as electricity consumption and freight volumes carried by rail were better indications of economic growth.

However, it is almost a decade now since he said that — and analysts named a now barely remembered index of such proxies after him.

China’s national statistics have become much more robust over the ensuing period, particularly those for industrial output which a decade or more back had known methodological flaws in their collection. Paradoxically, those have been mostly fixed just in time for industrial data to become relatively less important than that for services in the overall GDP number.

Similarly, measures like electricity consumption have become less reliable indicators of growth as the economy has become a more efficient consumer of power. Furthermore, is that electricity being used to run a mill or a mall?

Wang Baoan, the disgraced head of the National Bureau of Statistics who has been brought down by the anti-corruption campaign, had once said that tax data supported his office’s GDP numbers — not that that is an assertion that can be easily verified by outsiders.

In short, China’s numbers may have a wide margin of error, and state statisticians have become adept in optimising the GDP deflator used to convert between nominal and real growth (underestimating the inflation measure will give an impression of faster real growth), but fudge is not the same as fabrication.

For one, policymakers themselves need a more not less accurate GDP number to direct the economy along its decelerating glide path towards ‘rebalance’. Even China would be unlikely to be able to conceal the existence two sets of books indefinitely.

China now publishes so much economic data that evidence of activity, in piecemeal parts of the economy at least, is hiding in plain sight. Perhaps the one thing that can be said with certainty is that both the official statistics and the numbers proffered by their critics are now mostly headed in the same direction.

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August 27, 2016 · 4:06 pm

IMF Ups Its Economic Outlook For China

THE INTERNATIONAL MONETARY Fund exempted China from its ‘Brexit’-induced downgrades to its global economic forecast. In its mid-year update to its World Economic Outlook it has raised its forecast for China’s growth this year by 0.1 of a percentage point from its April projection to 6.6 percent and left its forecast for 2017 unchanged at 2.2%.

The Fund notes the effectiveness of the infrastructure spending stimulus in the first half of this year and the relative isolation of China’s economy from Brexit effects. However, it does warn that China would not escape the effects of a severe downturn in the European economy should that happen as a result of Brexit. And this Bystander has noted some of the risks to stimulus spending.

The IMF’s key paragraph:

In China, the near-term outlook has improved due to recent policy support. Benchmark lending rates were cut five times in 2015, fiscal policy turned expansionary in the second half of the year, infrastructure spending picked up, and credit growth accelerated. The direct impact of the U.K. referendum will likely be limited, in light of China’s low trade and financial exposure to the United Kingdom as well as the authorities’ readiness to respond to achieve their growth target range. Hence, China’s growth outlook is broadly unchanged relative to April (with a slight upward revision for 2016). However, should growth in the European Union be affected significantly, the adverse effect on China could be material.

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Stimulus Spending Steadies China’s GDP Slowdown

THE SECOND-QUARTER GDP growth figure came in at 6.7%, the same as for the first quarter. So growth for the first half was surprisingly steady and, surprise, surprise, bang in the middle of the government’s target range for the year of 6.5%-7.0%. Policy support through state-sector infrastructure spending has done the trick.

More of it will probably be needed in the second half. The economy expanded at 6.9% last year, so the slowdown is real if gradual.

However, it cannot slow below 6.5% if the 2021 centenary of the founding of the Communist Party is to be celebrated by hitting the goal of doubling GDP from its 2010 level and thus creating a ‘moderately prosperous society’.

That, in turn, will require more progress on ‘rebalancing’ the economy than has been made to date. At the same time, the infrastructure spending being used to juice growth risks a build-up of more debt with the accompanying concerns that more of it will go bad.

As IMF deputy managing director Mitsushiro Furusawa noted at a symposium on July 11:

A rising share of debt is held by Chinese companies that do not earn enough to cover their interest payments. The most recent IMF Global Financial Stability Report estimated that “debt-at-risk” had increased to 14 percent of listed Chinese companies’ debt, up from 4 percent in 2010.

Still within the bounds of manageability, but moving closer to them rather than away.

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IMF Nudges Up China Growth Forecast, Cajoles On Reform

THE INTERNATIONAL MONETARY Fund has nudged up its growth forecasts for China over the next couple of years. The latest update to its World Economic Outlook says the Fund expects growth to be 6.5% this year and 6.2% next, both 0.2 percentage points higher than its January forecast, which in turn had been unchanged from last October’s.

These are both lower growth rates than 2015’s 6.9%, however. The Fund identifies policy stimulus as the reason for its revision, but adds:

A further weakening is expected in the industrial sector, as excess capacity continues to unwind, especially in real estate and related upstream industries, as well as in manufacturing. Services sector growth should be robust as the economy continues to rebalance from investment to consumption. High income growth, a robust labor market, and structural reforms designed to support consumption are assumed to keep the rebalancing process on track over the forecast horizon.

The Fund forecasts inflation to remain low at about 1.8% in 2016, reflecting lower commodity prices, the real appreciation of the renminbi, and somewhat weaker domestic demand.

It also notes the challenges of rebalancing and says with some understatement that the transition “has been bumpy at times”.

Slowing growth has eroded corporate profitability, which in turn, hinders firms’ ability to service their debt obligations, raising banks’ levels of nonperforming loans:

The combination of corporate balance sheet weakness, a high level of nonperforming loans, and inefficiencies in bond and equity markets is posing risks to financial stability, complicating the authorities’ task of achieving a smooth rebalancing of the economy while reducing vulnerabilities from excess leverage.

It also says:

Limited progress on key reforms and increasing risks in the corporate and financial sectors have led to medium- term growth concerns, triggering turbulence in Chinese and global financial markets. Policy actions to dampen market volatility have, at times, been ineffective and poorly communicated.

The risk is that:

A sharper-than-forecast slowdown in China could have strong international spillovers through trade, commodity prices, and confidence, with attendant effects on global financial markets and currency valuations.

That would be felt in both emerging market and advanced economies. On the upside well-managed rebalancing would ultimately lift global growth and reduce tail risks.

The Fund says the international community should therefore support Beijing’s efforts “to transit to a more consumption–and service–oriented growth model while reducing the vulnerabilities from excess leverage bequeathed by the prior investment boom”.

To that end, strengthening the influence of market forces in the Chinese economy, including in the foreign exchange market, is a key objective.  However:

Further structural measures, such as social security reform, will be needed to ensure that consumption increasingly and durably takes up the baton from investment. Any further policy support to secure a gradual growth slowdown should take the form of on-budget fiscal stimulus that supports the rebalancing process. Broader reforms should give market mechanisms a more decisive role in the economy and eliminate distortions, with emphasis on state enterprise reforms, ending implicit guarantees, reforms to strengthen financial regulation and supervision, and increased reliance on interest rates as an instrument of monetary policy.

The Fund notes the progress in financial liberalization and in laying the foundations for stronger local-government finances, but says, again, that the reform for state-owned enterprises needs to be more ambitious, clearly laying out and accelerating a substantially greater role for the private sector and hard budget constraints.

Easier to say than politically to execute. Little progress is being made on dismantling the clientelist structure of state-owned enterprises, as a reading between the lines of what this state media report on the recent meeting of the Leading Group for State-Owned Enterprises Reform doesn’t say highlights.

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