By John Richardson
THIS year’s “sugar high” was always going to be that exactly that – if you look at the right data. The staggering increase in China’s total credit in Q1 2016 over the first quarter of last year –by as much as 58% – was only ever going to deliver a mild, and unsustainable, uptick in GDP growth.
And even this mild uptick is now under threat. The latest Caixin/Markit Manufacturing Purchasing Managers’ index – for April – declined. This was the 14th consecutive month in which this particular index has shrunk.
What data was I talking about at the beginning of this post? As an important reminder, it is this:
- Chinese government researchers estimated that in 2007, $1 of credit added 83 cents to GDP growth.
- By 2013, $1 was only adding 17 cents, and it was thought that in 2014 each dollar of new borrowing would only add 10 cents to growth.
It is therefore reasonable to assume that if you today added more oversupply in real estate and in steel and cement etc. today, this would reduce GDP growth.
And yet on the subject of cement, even more new factories are being built, as I discussed last month.
Real estate prices are also on the rise again, despite already quite alarming affordability levels in some of China’s biggest cities.
When I was in Shanghai last month, I was asked by a Chinese friend what the multiple of an average salary was over the cost of an average home in Perth, Australia, where I live. Perth is an expensive real estate market, relative to several other parts of Australia.
“Rule of thumb, around seven times,” was my reply.
She did some quick calculations on her smartphone and showed me the equivalent for Shanghai – 33. Yes, this is not a misprint – 33.
Here is a question for you: How on earth can this be socially and politically – and so, of course, economically – sustainable?
Against what you might perceive as excessive negativity you can present a great deal of other types of data, on, say, the growth in internet sales, which, I agree, offers huge potential. As The Economist wrote last week:
In 2010 online shopping accounted for only 3% of total private consumption, but it now makes up 15%.
The same article talks about continued strong growth in overall retail sales, and concludes with this perhaps rather bold claim:
China’s consumer economy will expand over the next five years by some $2.3 trillion. Despite the deficiencies in economic forecasts, that incremental gain would be bigger than the entire consumer economy in Britain or Germany today.
But if you told this story to Zhang Yuzeng, a freelance electrician, carpenter and plumber, who lives in the city of Shenyang in northeast China, he would surely stare at you in disbelief.
Mr Zhang, as the New York Times reports, is today lucky to earn $30 a day, if he can find any work at all, compared with the Old Normal rate of $50 a day or more.
He is struggling get by because Shenyang is heavily dependent for its growth on real estate and steel.
As the “law of diminishing returns” that I just detailed above indicates, no amount of new credit can make enough of a difference to Shenyang because of the quite breath-taking levels of oversupply in real estate, steel and other “old industries”.
Plus, economic reforms were continuing at apace with steel mills etc. being closed down – before this latest renewed and largely wasted surge in credit.
What do these contrasting impressions of China tell us? It is these four things:
- That the Q1 2016 surge in credit was an attempt to return to the “Old Normal”, but it could never possibly have worked. This was always mathematically impossible.
- This new rise in lending represents another example of just how long, and difficult, the reform process is going to be.
- But the reformers, led by the determined and visionary Xi Jinping, remain committed.
- Nobody should pretend to know – and that’s the honest answer – how long it will take the new sources of growth to replace the permanently lost, old sources of growth. Will the transition even work successfully at all?
This just scratches the surface of the multiple layers of complexity surrounding China’s attempts to build a New Normal.
But the above serves as reminder that you need multiple scenarios.
Only by building, and constantly revisiting, these multiple scenarios will you be able to make a success of doing business in China in the future.
