China’s new premier, Li Keqiang, was the first senior official to confirm that the country’s GDP figures were “for guidance only”, being “man-made and therefore unreliable“. As he told the US ambassador in 2007, he instead used electricity consumption and bank lending (plus rail cargo) as his key indicators. It therefore seems appropriate to mark Li’s appointment this month by reviewing the latest data. As the chart shows:
• Lending (red column) and electricity (green line) had the usual strong start in January
• But both dipped sharply in February. This seems more than just the effect of Lunar New Year
• Electricity consumption was down 12.5% versus 2012, and the lowest since February 2011
• Combined January/February consumption was thus only up 5.5%
Electricity consumption has proved a good proxy for real GDP growth in the past. And now a senior official has confirmed that those expecting a major new wave of stimulus spending are likely to be disappointed.
Liu Shijin, deputy director of the State Council’s Development Research Center, warned on Sunday that “some may think the economic growth has bounced back from the bottom since the fourth quarter last year and will regain high-speed growth above 9 percent – but they are too optimistic.” Instead, he described the recent economic bounce as only “temporary”.
Another senior official, Zhu Zhixin, deputy director of the National Development and Reform Commission, made the new leadership’s position even clearer. He stated that “the pivot point is to guarantee housing for subsistence needs, or the housing demand from low-income citizens“. And he added that whilst the government regards construction as a core pillar for the economy, “China does not regard its property market as a pillar sector“.
More signs are thus emerging that major economic reform is underway. Hence 1993’s leadership transition may well provide a useful parallel for today’s policy changes. Then president Jiang Zemin (kingmaker in the recent politburo appointments) and economics minister Zhu Rhonji initiated a major credit crackdown to curb speculation in the property market. Property prices dropped 40% in the major cities, and private sector GDP growth was just 3%.
Recent speculation in the property market has been on a much greater scale. Current prices in the major cities are twice as expensive in terms of earnings as in the US at the height of the subprime bubble. As Wang Shi, chairman of China’s largest real estate developer Vanke, has warned “there are obvious bubbles in the property market, and it is possible it will get out of control and crack.”
Whilst it will therefore be very painful to burst the bubble in the short-term, the risks of allowing it to continue could prove far worse.