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China GDP: push me pull you (321 words)
by Lex, January 21, 2015 6:15 pm
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China announces what the market already knows: annual economic output grew by “about 7.5 per cent”. The actual number: 7.4. Despite the lack of surprise, this can still be taken as either a disaster or a relief. Bears decry the slowest growth since 1990. Bulls trumpet a positive surprise: economist forecasts for 2014 had been revised down to 7.3 per cent (merely the lowest number that could still be rounded up to 7.5).
Either way, China is slowing on an annual basis. Again, no surprise since there is more of the economy to grow: 7.4 per cent of a $17tn economy is more than 10 per cent of the $6tn economy China was a couple of years back.
Of more concern are the economic imbalances. China has long been a junkie of fixed-asset investment, which accounts for about half of GDP — even as that investment becomes increasingly unproductive. Sluggish state-owned enterprises with implicit government-backed loan guarantees receive more capital than is rational. Vibrant small and medium enterprises, responsible for 60 per cent of GDP and three-quarters of new job creation, attract less funding.
China is making piecemeal progress towards implementing change. This month’s launch of WeBank, backed by private enterprises (including Hong Kong-listed Tencent) indicates that the incumbent banks — as firmly entrenched a vested interest as can be found — have lost one round. WeBank targets the smaller borrower. Alibaba, which already extends loans to some of its customers, is likely to launch next.
Structural change generally brings pain. Monetary palliatives might help by stimulating more liquidity. Economists expect more easing after last November’s interest rate cut. Yet this, too, has unintended consequences as liquidity flows to shadow finance and into mainstream risk assets. This week’s stock market slump as the government moved to curb stock speculation through use of margin lending illustrates the sensitive balance.
China’s economy will shift, but the route to change is clearly bumpy. Expect more carrots and sticks — and more bumps — ahead.
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