Source of picture: millermmccune.com
How quickly is China shifting its economy away from exports towards stronger domestic consumption?
The answer to this question is, of course, critical to the global chemicals industry.
On the surface it looks good: Retail sales grew by 16.6% in the first half of 2009 and by a slightly more modest 15.4% in the year-to-date.
The problem is how retail sales are calculated as they include government purchases and shipments to retailers before any sales to actual consumers (could these healthy figures include, therefore, lots of unsold washing machines, fridges etc? China’s government has introduced a huge subsidy scheme aimed at encouraging rural residents to buy more white goods, but is unsure of its success).
Michael Pettis – on his always-pessimistic China Financial Markets blog - believes this leaves retail sales as a poor proxy for overall consumption.
He quotes Jim Walker’s 14 September issue of Asianonomics, where Walker points out that retail sales have grown at 13-24% over the last six years – well in excess of the increases in GDP (gross domestic product).
Real consumption has, in fact, being growing at only 8-9% over the past few years, concludes Pettis.
This would mean consumption as an arithmetical share of GDP has fallen as GDP has been expanding by 10-12% per year.
A lot of money is going into investment in more surplus capacity, much of which might be inefficient because of the low cost of capital, he warns.
Consumers are subsidising lending costs through low-wage growth and low deposit rates, he adds.
Low-wage growth is obviously no good for encouraging greater, genuine domestic spending.
But low deposit rates versus better returns on local equities and the property market have been partly behind the recent booms in both.
Pettis is gloomy about the long-term ability of China’s government to re-balance growth.
The Chinese Economic Quartely’s view, however, is “worry – but don’t kill yourself” over the pace of and extent to which re-balancing will occur.
Temporary setbacks are possible, but the CEQ believes the government has the financial muscle to get there.
China never gets any easier.