- Concerns mount economy could slow as Beijing seeks to cool property sector
The Chinese economy expanded at an annual rate of 6.7 per cent in the third quarter, in line with the government’s full-year target, but exacerbating fears of inflated corporate debt levels and overheated property markets.
Many analysts believe this year’s better than expected growth in China has been the byproduct of a dangerous expansion in credit, especially for real estate developments and state-backed infrastructure projects.
“Credit growth continues to outstrip nominal GDP growth, building on an already enormous base of outstanding debt,” said Eswar Prasad, a China finance expert at Cornell University. “The cost of hitting short-term growth targets is becoming a rising burden for the financial system, with stresses periodically erupting in different parts of the system. The housing market is the latest pressure point.”
More than 20 urban governments across China have recently introduced measures to restrain house prices, which over the past year have increased by as much as 25 per cent in cities such as Beijing and Shanghai. Analysts believe the sector accounts for more than half of all investment, after factoring in demand for everything from concrete to household goods.
China’s National Bureau of Statistics also sounded a cautionary note. “We must be aware that economic development is still in a critical period of transformation, with old growth drivers to be replaced by new ones,” Sheng Laiyun said at a briefing on Thursday. “With unstable and uncertain domestic and external factors, the foundation for continued economic growth is not solid enough.”
China’s GDP grew 6.7 per cent in the first and second quarters of 2016, defying fears of a sharper slowdown after turmoil on the country’s currency and stock markets dented global confidence in Beijing’s macroeconomic management.
Two critical growth engines, retail sales and investment, have powered the Chinese economy this year, rising 10.7 and 8.2 per cent respectively in September.
“Retail sales and investment are both in line with expectations,” said Zhu Haibin, chief China economist at JPMorgan in Hong Kong. “The only disappointment came from industrial production.”
Industrial production growth slowed to 6.1 per cent in September, which Mr Zhu said was a “pretty soft number”. He also warned that real-estate investment and car sales were likely to moderate in the near future, putting the economy on a “downward trend” as it enters 2017.
Next year will be critical for China’s President Xi Jinping as he prepares for a leadership transition that could determine whether he will be able to push through difficult economic reforms during his second five-year term. While Mr Xi’s advisers have sounded alarms over China’s dangerously high levels of corporate debt, they also want to ensure stable economic growth and job creation through the transition.
Last year Chinese economic output grew just 6.9 per cent — its slowest annual expansion in a quarter of a century. But government officials have embraced what they say is a “new normal” of slower, more balanced growth, saying they would be comfortable with growth as low as 6.5 per cent this year.
“The Chinese economy has experienced an extended period of relative stability, albeit at 25-year lows,” said Jeremy Stevens, chief China economist at Standard Bank. “Essentially they’ve got their 6.5 per cent growth for the year.”
China’s annual growth rate dipped as low as 6.2 per cent in the first quarter of 2009 as the country was buffeted by the global financial crisis. That slowdown was the catalyst for a Rmb4tn government stimulus programme that boosted global demand at a critical time but also led to overinvestment in a number of heavy industries, such as coal and steel, and contributed to a sharp rise in corporate debt levels.
Last week China’s State Council, headed by Premier Li Keqiang, approved a controversial debt-for-equity programme and other measures aimed at reducing corporate indebtedness. Chinese companies have accumulated $18tn in debt, equivalent to about 170 per cent of GDP.
The International Monetary Fund, which has repeatedly warned Beijing about corporate debt levels, has projected that China’s economy will expand 6.6 per cent this year and 6.2 per cent in 2017.
In nominal terms, growth increased 7.8 per cent in the third quarter, a sign that deflationary pressures are continuing to ease. Last week the NBS reported that producer prices had increased on an annual basis for the first time in more than four years.
This represented a dramatic turnround from late 2015, when year-on-year producer price deflation was running at almost 6 per cent, and will relieve the pressure that has been building on China’s heavy industries.