China has now published initial data on its key areas of GDP growth in 2012. As the chart shows, this highlights the major task ahead of the new leadership as they seek to rebalance the economy towards a more sustainable future:
• Infrastructure (green) continued to increase as a share of GDP to 46%
• Household consumption (red) was flat at 36%
• Net exports (black) declined to 3%
The major issue facing China’s economy has been the collapse of exports, which were 9% of GDP in 2007. These are unlikely to recover due to the ending of the BabyBoomer-led demand SuperCycle. Western manufacturers no longer need to outsource production to China and as the blog will discuss on Saturday, some production is already beginning to return to the West.
Thus President Xi and Premier Li have little choice but to refocus the economy on household consumption. Their problem is that the previous leadership allowed its share to fall from 44% over the past decade (yellow highlight), whilst infrastructure’s share increased from 36%.
By contrast, most developed countries base their economies on household consumption, which is 60% of Western GDP. Essentially, China’s ‘dash for growth’ on joining the World Trade Organisation in 2001 means it now has vast amounts of unneeded new capacity. Its dream of becoming the ‘manufacturing capital of the world’ risks turning into a nightmare.
Over-capacity not only exists in major industries such as steel, but also in housing. China’s statistics board notes that 3.7bn m² are currently under construction – 4 years’ worth of demand. And as the blog has noted before, cities such as Ordos are still waiting to be occupied.
Equally problematic is that since 2008, the previous leadership had avoided tough decisions by boosting credit. But this has been subject to the law of diminishing returns as Bloomberg note:
“(In Q1) each $1 in credit firepower added the equivalent of 17 cents in GDP, down from 29 cents last year and 83 cents in 2007, when global money markets began to freeze”.
Similarly ratings agency Fitch warn that China has effectively been “adding assets at the rate of an entire US banking system in 5 years.” These conclusions are very similar to the blog’s own concerns since 2010, that China’s attempt to reflate its economy via massive lending programmes could easily go badly wrong.
Fitch also worry about the growth of so-called wealth management products in China. As the Bank of China’s chairman warned in October “To some extent, this is fundamentally a Ponzi scheme“, where new investments are used to pay the high interest offered to earlier investors.
The new leadership clearly understand the risks they face. They also seem increasingly likely to try and clamp down hard on the major problems sooner rather than later. 5% GDP growth may therefore prove to be a maximum rather than a minimum level for the next couple of years.