fter record capital outflows, stock market turmoil and a renminbi under severe pressure, the world has been waiting for reassuring economic news from China. So much so, that even when Beijing announced the country’s lowest economic growth rate since 1990, investors took comfort and set global equity and oil prices on to a firmer trend.
Some optimism is justified. The official growth rate may have slowed from 7.3 per cent in 2014 to 6.9 per cent last year, but that remains within touching distance of Beijing’s official target of around 7 per cent. There was also unambiguous evidence that China is starting to achieve its long-heralded transition away from investment and heavy industry as the main locomotives for growth in the world’s second-largest economy. The huge steel and power sectors announced a full-year contraction in output volumes.
Equally encouraging for the cause of structural transformation were figures showing that consumer spending contributed 66 per cent of China’s gross domestic product growth, the biggest contribution since 2001. Further underlining this shift, a booming service sector accounted for 50.5 per cent of GDP growth, 10 percentage points more than the once-dominant manufacturing sector.
Such progress, however, does not disguise either the pain inherent in the transition or the deep faultlines that threaten to fracture China’s dynamism. Chief among these is the uncomfortable fact that China is buying much of its growth through a ballooning issuance of corporate and household debt.
Not only does China have the world’s highest private debt levels — having overtaken the US, Japan and South Korea since the 2008-09 financial crisis — it also has the highest debt service burden as a proportion of GDP alongside Korea, according to estimates from the Bank of International Settlements (BIS). Indeed, the costs of servicing Chinese private debts amount to around 20 per cent of GDP, up from 12 per cent in 2009, the BIS says.
Such debt burdens, coupled with overcapacity in several industries and declining industrial profits, threaten to tip China’s investment slowdown into a disorderly rout. The investments made by companies slipped sharply in December, falling well below the full-year expansion rate of 10 per cent.
The danger now is that the contraction in industrial profits, the debt service burdens and a flagging property market could together depress household income growth — jeopardising the consumer spending that forms the most robust stratum in the economy.
For its own sake and for that of an imperilled global economy, Beijing should prepare a robust fiscal and monetary bulwark against signs of consumer fatigue. With a fiscal deficit that totalled 2.3 per cent of GDP last year, China still has room to divert extra fiscal resources to support welfare payments for less well-off segments of society, thus helping to shore up spending.
In addition, Beijing should consider aggressive cuts to its bank required reserve ratios this year, thus releasing significant stores of liquidity into the economy and boosting demand. In addition, gradual cuts in interest rates may also help alleviate the debt service burden falling on corporations.
Many economists do not give credence to China’s official GDP figures, believing the real rate of growth to be significantly slower. But whatever the reality, Beijing faces a risk that without measures to support consumer spending, the current slowdown could morph into a slump. Recent events have shown how fragile confidence can be when it starts to unravel.
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