China’s economy no longer a growth story

Michael Sainsbury

 In newspapers across the globe this morning and on websites yesterday China’s quarterly GDP and other monthly data were trawled through with the focus on the “shock” of slightly slower growth. There were “fears” about slower “recovery”, concerns about new “stimulus”, gold took its worst tumble for years and stockbrokers quaked in fright(about their bonuses) dumping shares. This is not because China’s economy was growing at a slower pace than expected but because they know that market sentiment dictates worse than expected numbers from China means people sell, hence a big morning slump as they all try to outsell each other and some bargain hunting after lunch push the index back up. That old China story, fast growth versus slow growth.

For the kangaroo riding on the dragons back the action is usually more marked elsewhere, unsurprising when we send it more than 30 per cent of our exports and two-way trade climbed to $122 billion last year. But the simple story for the markets Chinese growth, faster or slower, is an old one – not that you would know it from many reports.

Of course it’s hardly head scratching that we are seeing slower growth, after all that is now government policy.

“It’s not impossible to grow faster..,we don’t want to grow too fast,” Xi said at the Bo’ao Forum for Asia ten days ago. “I don’t think China can sustain super-high or ultra-high-speed growth,” he said. Xi said China’s slowdown last year to 7.8 per cent economic growth is “partially due to our efforts to control the speed of growth.” Yes there are other factors such as weak export markets from China’s major customers as well as an ageing work force and rising labour costs, which is seeing some low margin manufacturing move to other countries such as Vietnam and Bangladesh. But in a county where the government still controls so much of the economy, its policies count for a lot.

The new(ish) China story is about if and how the country can institute a new model of lower more sustainable higher quality growth. It has mounting debt and the China bears believe too much of this is bad debt, it needs to be cleaned-up and can’t be in an environment where the government is printing money to keep growth romping along at 8 per cent or more. The Chinese government, like those in the west has kicked the debt can down the road for too long. Now it needs to switch gears to promote growth based on consumption and a burgeoning services sector.  It needs growth that won’t see the waste, bad debt, debilitating pollution and increasing alienation of its people from an increasingly distant and different ruling class. Whether the new government can structurally shift the investment decisions away from government and back towards the private sector is yet to be seen. It’s much harder to report – growth up or down is a gift really –but some outlets aren’t really trying and that’s dudding the reader. Not to mention that newspapers still insist on wasting increasing precious space running a yarn that’s 24 hours old by the time more readers get to it. You really think if they haven’t picked it up on the internet by then that there is any interest?

The economic rebalancing, as many like to call (away from investment towards consumption) is a very big ask for the Chinese leaders and is much riskier and difficult to manage than government spending and cheap export driven go-go growth. Those days are over and as Xi Jinping and Li Keqiang embark on a new set of economic reforms – getting the order right is just one important wrinkle – the Chinese economy is likely to offer more surprises than not.

While its early days, Xi appears to be very committed to reform. His anti-corruption and waste-cutting drive through the ruling Communist Party is continuing apace – indeed the reduction in official banqueting and gifts has been cited and an interesting public indication of this has been the recent slew of articles in major Communist Party mouthpieces praising one of the Part’s great reformers, Hu Yaobang on the anniversary of his death. Hu was sacked as Party chief in 1995 and whose subsequent death four years later on April 15, 1989 triggered protests that would lead to the deadly calamity in and around Tiananmen Square 10 weeks later.

This relentless focus on growth makes people either forget or fail to realize that the quantum of China’s economy increases each year, a fair bit bigger than two years ago and double the size it was about seven years ago. And if we just check yesterday’s figure, it was growth of 7.7 per cent, on fudged highly contentious numbers, China’s leaders seem to come up with numbers. I don’t think that Australia has ever, in one year grown 7.7 per cent. But the figures are universally – including within the country’s leadership seen as rubbery, a the very least something that was probably worth including in every story having a look at the country’s numbers.

China’s monthly figures have become know as its data dump, without apparent irony in reference to the whiffy nature of many, if not most of the numbers. The final word in this should go to freshly installed Premier Li Keqiang, who has been reported as saying the only piece of data he uses as a guide to where Chinese economy is going is electricity production.

Analysis of the numbers themselves are a dangerous and treacherous road that has slipped up even the most ass-covering researchers and commentators in a country which confounds rivals who have state of the art data collection several light years ahead of China. That a poor developing nation where millions still get about by donkey and cart can produce national GDP figures less than two weeks after the books are ruled off for the month.

Then there is the grey economy which a study in 2010 said could be large as 30 per cent of the regular economy, some of this would caught be official figures but by no means all – so there are unseen forces pulling at both end of the figures.

One summer does not a swallow make and so one dip in (already contentious) GDP in China does not the Australian economy break. Indeed it would have to get a whole lot worse from here to have a material impact on the Australian economy, despite what the screen jockeys in Phillip St think, or think the market thinks. Steel production, the main game for Australian miners, continues climb although more slowly than before. Premier Li’s determination to focus on a fresh wave of urbanisation should give miners medium term comfort, at the very least. And while official inflation is down, everyone in central Beijing is whingeing about prices going up and up. For now, that’s a good thing.