China’s GDP grew 7.7% in 2013, according to government figures. Already on a downward trend since 2010, economic growth will slow further in 2014. The question is: how much further? This matters not only for China but also for investors in emerging markets who have recently been running for the exit, not least because of perceived risks to growth in China. The likely outcome is somewhere in the 7%-7.5% range.
As in previous years, China’s National Bureau of Statistics (NBS) issued its GDP figures for 2013 suspiciously promptly, on 20 January. Nominal GDP in 2013 was CNY 56,884.5bn (USD 9.3bn at the average exchange rate for 2013), 7.7% up on 2012 in real terms.
While below the average growth rate for the past 35 years of economic reform, this was still one of the highest GDP growth rates in the world, and comfortably above the 7% average annual GDP growth rate set in China’s 12th Five-Year Plan for the years 2011-2015 to allow for restructuring from an investment-driven, export-led economy to a more energy-efficient, environmentally-sound, consumption-driven economy. It also beat the government’s 7.5% target for the year.
The official quarterly GDP growth figures in 2013 indicate a pattern that may have been more pronounced in reality than is indicated by movements of one or two percentage points. First quarter growth of 7.7% year-on-year was followed by a decline to 7.5% as export growth slumped to 1% year-on-year in May and industrial output growth fell from 9.5% in the first quarter to 9.1% in the second, prompting the government to boost infrastructure spending to stimulate the economy, boosting third-quarter growth to 7.8%.
In the last quarter of 2013, exports, manufacturing and investment edged down, lowering the year-on-year GDP growth rate to 7.7%, and reducing quarter-on-quarter growth to 1.8%, compared to 2.2% the quarter before.
2013 was not a breakthrough year for economic restructuring. In real terms, fixed investment rose by 19.2% year-on-year while urban disposable incomes grew by a mere 7% and consumer goods sales by 11.5%. When the full expenditure-side GDP statistics have been calculated, they will no doubt continue to show investment far outweighing consumption as a proportion of GDP (by a ratio of about 50:35) and also as having contributed more than consumption to overall growth in 2013.
The targets for 2014 were set at a four-day Economic Work Conference – attended by the entire Standing Committee of the Politburo – last December that ended with a statement that China would maintain an active fiscal policy and a prudent monetary policy and a warning that the economy will continue to face downward pressure from industrial overcapacity, labour problems, environmental degradation, food and medicine safety, and social unrest.
The conference set six targets for 2014: ensuring stable supply and quality of agricultural products and food safety; speeding up industrial structural adjustment and resolving overcapacity problems; reducing local government debt risk; promoting co-ordinated regional development; raising living standards and supporting affordable housing; opening up the economy further and pushing ahead with free trade zones.
The official target growth rate for 2014 was not announced in the conference’s concluding statement, but, if there is one, is probably 7.5%, as this is the rate that has been forecast by the State Information Centre (SIC) and the Chinese Academy of Social Sciences (CASS). However, the SIC has advised the government to make the target 7% so as to focus more on reform and strengthening the economic structure.
A target much above 7% may in any case be difficult to achieve if the government, as it has promised, refrains from further stimulus interventions. Important sectors are likely to grow more slowly, or even shrink.
Industrial production is in the doldrums. The HSBC/Markit purchasing manager’s index (PMI) fell from 52.5 in November to 50.9 in December and 49.5 in January, now indicating not just a slowdown but a contraction in manufacturing output. The other PMI, issued by the NBS and the China Federation of Logistics and Purchasing (CFLP), also fell from 52.5 in November to 50.9 in December.
After recent massive investment splurges, this impending fall in output means that manufacturing enterprises will remain plagued by overcapacity, exacerbating indebtedness – and nonperforming loans, which have risen sharply in the past two years, even by official (under)measurements – and holding back growth in productivity and corporate profitability.
The slower rise – or an actual fall – in industrial output will be accompanied by a slower rise in merchandise exports, as several of China’s major markets remain dormant, resulting in a narrowing of the current-account surplus as the deficit on services trade remains wide.
The underlying fragility of China’s banking system, including the shadow banks, which were last year estimated to have expanded to US$6 trillion, persists, as illustrated the panic in January over the threat of default at China Credit Trust.
Several forecasters have been crying wolf over the Chinese housing market in the past few years. The bubble did not burst in 2013 and it may or may not do so in 2014, but the fundamental conditions for a burst endure: overpriced and oversupplied housing. A collapse of the housing market would cause mortgage defaults that would be a problem for the banks.
Nor is indebtedness a problem only for the private sector. The national government’s budget is not likely to be much higher than 2% of GDP. However, local and regional government debt has ballooned, standing at CNY17.9 trillion (US$2.9 trillion) in mid-2013, compared to CNY10.7 trillion at the end of 2010.
The main thing to look for in 2014 is the elaboration of reform measures stemming from last November’s Third Plenum of the Communist Party Central Committee. The policies announced then were largely a hodge-podge of old promises, but they did portend a gearshift towards faster reform, especially with the establishment of an authoritarian central body headed by Xi Jinping to force change on sluggish officialdom. If this reform HQ makes real progress, the medium- and long-term outlook will be better.
An important example is the one-child policy, which is starting to produce a worse demographic imbalance than countries such as Japan have already gone through. If the quite modest loosening of the one-child policy is fully implemented this year and extended to outright abolition, this imbalance can be mitigated over coming decades.
Look also for indications that the government is serious about dealing with corruption, house price inflation, pollution, innovation, the household registration system, and other factors that will have a long-term impact on productivity and economic restructuring.