The decline in China’s electricity consumption growth highlights the remarkable slowdown underway in its Old Normal economy, as the chart shows:
- Consumption growth took off in 2009 under the influence of the stimulus programme
- It rose 6.5% in 2009, and then accelerated further in 2010 when it was up 14.7%
- 2011 growth stayed at double-digit level – meaning consumption was up by more than a third compared to 2008
- It then slowed to 5.5% in 2012 and 7.7% in 2013, before new President Xi introduced his New Normal policies
- Growth fell to 3.8% in 2014, and was barely positive in 2015 at just 0.5%
These developments mirror those seen for commodities such as oil and metals, and for polymers, during the stimulus bubble. The problem was that then-President Hu and Premier Wen panicked at the start of the financial crisis in 2008, due to the job losses being caused in China’s export factories. Fearing major social unrest, which could lead to the end of communist party rule, they doubled lending to $20tn in 2009 – 4x China’s GDP of $5tn. And they kept their foot on the accelerator till they left office in 2013, by when annual lending had reached $28tn.
Temporarily, China’s demand appeared to rescue the global economy. And at the same time, the story spread that this was due to a previously hidden secret – that China had somehow become “middle class” by Western standards, without anyone really noticing. In reality, of course, average incomes were still only $5k/year in 2015.
But no country, not even China, can continue lending at such a rate. Its interest bill in 2015 was $1.7tn – almost equal to India’s GDP. And not only was much of the money wasted in building ghost cities and property speculation, but it also boosted corruption and pollution. Such a vast lending bubble created easy pickings for corrupt officials. And pollution rose to intolerable levels, as 2/3rds of China’s electricity production is based on coal.
Thus Hu and Wen’s 2008 panic ended-up by 2013 in creating an existential threat to continued party rule, as ordinary Chinese suffered the after-effects of the stimulus policy on a daily basis.
This is why President Xi had no choice but to cut back on stimulus, and abandon the idea of further growth in the Old Normal economy. But just as China still suffers from the legacy of pollution and corruption, so the global economy is still suffering from the vast supply gluts created in energy and mining markets, as well as chemicals and polymers:
- These gluts are actually getting worse, rather than better, as lead times mean that companies are still planning to bring new capacity online in the 2016-2018 time-frame
- And continued government stimulus policies outside China mean that companies and investors still find it easy to fund these “white elephants”
The story of China’s electricity consumption boom, and its recent collapse, will be a case study for future historians on the chaotic conditions created by the stimulus policies. For us, living today, it creates a more immediate issue – namely how to manage the supply gluts that they have created.
Business models will have to change as a result, as they are creating a paradigm shift in the global economy. Today’s supply-driven business models, based on the “build it, and they will come” principle, will have to be replaced by a new model focused on securing customer commitments to buy.