Economic Developments in China
China has not only shown a robust average 10% GDP growth over three consecutive decades, but also proved resilient to the international financial crisis.
However, following the sub-prime crisis there was a consensus that the underlying drivers of such economic growth would not be enough to sustain two digits increase of the annual Chinese GDP rates for another medium to long term period.
China’s status as the country of choice for industrial production in recent years, the massive fiscal stimulus provided to sustain unproductive industries and the infrastructure and building expansions, have been questioned.
Since the third quarter of 2015, several rapid and pronounced downturns in the Chinese stock market have been sounding the alarms on the whole economy and financial health of China, even after several interventions to mitigate such downturns.
As the statistical legitimacy in the Chinese economy is in doubt, there are different views about what such downturns in the Chinese stock markets could imply for the whole economy and credit of the country.
So far, while Chinese authorities reduced the annual growth rate estimate for the year 2016 to 6.8%, following a 6.9% increase in 2015 (which was the record low of the past 25 years); there are some views that Chinese GDP would not increase at annual rates higher than 4% in 2016 and beyond, a magnitude which would put a risk on the global economy.
Moreover, the ratio of total debt to GDP in China has been dramatically increasing during the last decade reaching 242% in 2015, which is high by global historic standards and unquestionably problematic due to the contraction trend in GDP.
Trying to validate the trends, we can use parameters obtained from other countries with those of China. In this regards, the recorded drops of industrial production in Germany (-0.3%) and Brazil (-2.4%) for the month of November 2015 are both attributed to a contraction of Chinese demand for industrial products. These countries and drops correlate with declining Chinese imports of 8.7% and 10%, in November and December 2015.
To improve the industrial sector over the last five years, Chinese authorities have made attempts to close inefficient mills. In 2016, a set of mandates are expected to be introduced in order to halt excess capacity of obsolete units as utilization rates for many heavy industries are around 70% and fiscal stimulus and credit support is not expected to continue for the sector. However, local officials and managers remain are strongly opposed to the mandates.
From this perspective, the indicators of the industrial economic activity are also suggesting a contraction of the economy and a low quality of corporate debts, consequently compounding the concerns over the near future.
From the financial point of view, another important risk emerges from the Local Governments Financial Vehicles (LGFV) which provides funds to local governments (municipalities) and the municipality in turn transfers land-use rights, or existing infrastructure such as highways or bridges, to the LGFVs. The risks relate to the potential correction of the real estate market that would trigger the revaluation of land collaterals owed to banks through LGFVs and a chain of loans recalls. LGFVs are estimated to be around 10,000.
All in all, a fundamental support for growth in China is heavily dependent on the expected rise of private internal consumption, which not only would contribute to improving the Chinese economy, but also would rebalance global trade.
Urbanization, the most important factor of such expected growth in internal consumption could have been approaching a limit as the restrictions (hukou) applicable to citizens moving to cities are being slowly eased while the policy of allowing a second child per couple is not expected to produce a short term effect.
The expectation of improving income for farmers has recently been vanishing due to the downwards trend in farm products prices.
All in all, there are many factors at play and reasons to consider that the Chinese future could be negative and more than a mere short-term slowdown of economic growth. The size of its economy and its complexity can not preclude a potential negative correction with implications on a global basis.