China Says GDP Gains as Growth Engines Lag

An analysis by Michael Lelyveld
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china-gdp-growth-oct-2017.jpg Visitors walk past a chart showing China's soaring GDP since 2012 and a photo of Chinese President Xi Jinping at the Beijing Exhibition Hall in Beijing, Oct. 19, 2017.
AP Photo

China's economic expansion accelerated last year for the first time since 2010, the government said last week despite slower increases in the key components of growth.

In its annual release, the National Bureau of Statistics (NBS) said that gross domestic product rose 6.9 percent, a notch faster than the 2016 growth rate of 6.7 percent.

The official 2017 growth rates were evenly balanced at 6.9 percent in the first two quarters and 6.8 percent in the final two quarters of the year.

In its statement, the NBS repeatedly cited the "stable and sound development" policies of President Xi Jinping, although the headline GDP figures climbed far above the government's target of "around 6.5 percent" growth.

The international press greeted China's numbers with skepticism, in what has also become an annual ritual.

"In reality, the pace of growth in China's economy is anybody's guess," The New York Times said.

Among the many reasons for doubt are slowing growth rates for fixed-asset investment (FAI), dedicated to long-lasting items like infrastructure, buildings and machinery.

FAI has been one of the traditional props for China's expansion, but growth fell last year to 7.2 percent from 8.1 percent in 2016.

The growth slowdown has persisted for the past eight years.

In 2009, FAI soared 30.1 percent from a year earlier to 22.4 trillion yuan (U.S. $3.5 trillion) after rising 25.5 percent in 2008, according to past NBS reports.

Since then, the growth rates have slipped into single digits after reaching 10 percent in 2015. In the first nine months of 2017, the rate dipped to 7.5 percent. In recent weeks, forecasts for the full year were as low as 6 percent.

The FAI slide coincides with the diminishing effects of China's controversial 4-trillion yuan (U.S. $624-billion) economic stimulus package in 2008-09, suggesting a possible cause.

The NBS reports cumulative FAI figures throughout the year, but growth rates for individual quarters have looked even worse.

In a recent analysis for Barron's weekly, former People's Bank of China (PBOC) official Yu Yongding cited weak investment as a major reason why the country's economy "could disappoint" this year.

Yu noted that in the first three quarters of 2017, FAI rose at an average rate of 2.19 percent year-on-year and turned negative in the third quarter with a decline of 1.1 percent.

"China hasn't seen such lows in decades," he said.

Consumer spending

As investment growth has faded, the government, with the support of the International Monetary Fund, has given priority to consumption-led growth for much of the past decade.

China's leaders have pledged to modernize the economy by encouraging more consumer spending to spur growth, leaving reliance on debt-driven investment behind.

Last June, at the Summer Davos meeting of the World Economic Forum in the northeast city of Dalian, Premier Li Keqiang told business leaders that China had shown itself "fully capable" of meeting its growth targets without leaning on investment.

"China neither took strong stimulus measures nor followed the old investment-driven and resource-reliant path, but strived to innovate and reform in its drive toward an economic shift to consumption and services," the official Xinhua news agency quoted Li as saying.

Xinhua also underscored China's shift to the new growth factors in its reporting last week.

"As the growth driver of investment slows, services and consumption have risen to take up the slack," it said.

But doubts may also surround the strength of consumption growth, despite the ballyhooed boom in online sales.

Retail sales of consumer goods rose 10.2 percent, but growth slowed from 10.4 percent in 2016, according to NBS data. Per capita consumption spending increased at an inflation-adjusted rate of just 5.4 percent.

Consumption accounted for 58.8 percent of China's economic growth last year, the NBS said, without citing a year-earlier figure. The proportion reported last January for 2016 was significantly higher with consumption's contribution recorded as 64.6 percent.

The disappointing estimate appears to be affecting economic policy for the coming year.

After years of promoting economic transformation through greater consumption, China's government may be turning back to old-fashioned investment as a more reliable way to generate growth.

On Jan. 5, the state-controlled Economic Information Daily released its outlook for 2018, giving investment top billing over consumption.

"Investment and consumption will be the two engines to drive China's economic growth in 2018," said the official English-language China Daily, quoting the report.

According to government think tanks, FAI will grow by 6.3-6.5 percent this year to 69.2 trillion yuan (U.S. $10.8 trillion).

Consumption would rise by 10 percent, the report said without giving a total.

"Consumption still plays [a] significant role," China Daily said in its summary, suggesting lesser importance in prospects for growth.

The preference for consumption-led growth makes the appearance of a new focus on investment all the more unusual.

One possible reason for the focus among state think tanks is that the government may be able to stimulate investment more easily than it can spur consumption or other growth generators like exports.

"Household consumption is unlikely to pick up the slack," Yu Yongding wrote. "Growth in net exports, too, seems unlikely to offset declining investment, not least because U.S. President Donald Trump continues to lean toward protectionism in his dealings with China," he said.

Aside from external factors, the government has deliberately dampened investment in real estate by urging municipalities to restrict speculative buying in the housing sector.

The policy has been aimed at deflating price bubbles and making housing affordable for first-time buyers, but it has also affected investment in a host of construction-related industries.

Infrastructure is a second major magnet for FAI. But infrastructure investment is already so high that it has relatively little room for growth, Yu suggested.

Data reliability

The questions about investment and consumption only lead to more complicated questions because of longstanding problems with NBS reports.

Derek Scissors, an Asia economist and resident fellow at the American Enterprise Institute in Washington, said the official data on consumption's contribution to GDP has been "faked for several years," presumably to paint a rosier picture of China's economic transformation.

"So, maybe they realize that's no longer credible. In any case, consumption is unreliable," said Scissors.

Investment figures have been more reliable in the past, but recent below-average investment in the manufacturing and property sectors have raised doubts.

The questions become more complicated when examinations try to trace investment activity in the more than two dozen categories of business types that NBS has listed on its website.

For reasons that have yet to be explained, NBS reports on private investment growth have never corresponded with the numbers given for the listed sub-category of "private enterprises" on the NBS site.

According to the NBS, which reports FAI in nominal terms, private investment growth through November reached 5.7 percent from a year earlier. But the NBS website shows FAI growth by "private enterprises" as 10.2 percent for the same period.

The NBS statements on FAI are believed to be the result of a composite of businesses drawn from various listed categories, including cooperatives, joint ventures, individually-owned enterprises and limited liability corporations (LLCs.) But the NBS formula is shrouded in mystery, making firm analysis next to impossible.

The imprecision is important because "private" investment accounts for over 60 percent of China's total and over 80 percent of its jobs, according to the NBS.

In the current case, the FAI falloff is attributable to steep declines in investment by "non-wholly state-owned" LLCs, which the NBS lists as "other limited liability corporations."

The category has shown a dramatic drop in investment growth last year through November, down to 3 percent from 24.2 percent in the comparable period of 2016.

The reasons for the plunge have not been explained, but the investors are "presumably worried about debt levels affecting their share prices," Scissors said.

Another possible cause is the government's push to steer investors into public-private partnership (PPP) deals with less efficient state-owned enterprises (SOEs). Last year, state media cited reluctance among private investors due to high risks and poor returns.

Whatever the reason, the government appears to be signaling greater concern about promoting investment.

"This drop is short-term to this point, but scary, and I'm sure they want to pep up these people," Scissors said, referring to the LLCs.


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