China could hit 9% growth, but for how long?

A return to government investment is expected to prime the pump in the first half of the year; the question is how long Beijing can keep it up.
David Carbon

David Carbon, chief economist at DBS in Singapore, has a simple message: China is back. He argues that we could see Chinese GDP growth hit 9% this calendar year. The reason? Government investment, he told the Asia-Pacific Corporate Funding Forum arranged by FinanceAsia and The Corporate Treasurer last week.

He says Western malaise is now irrelevant, noting that for the past four years, as America, Europe and Japan drifted, Asia as a region toted up compound average rates of growth in excess of 7% per annum.

Most of that is down to China’s investment programme. Investment accounts for more than 47% of its GDP, and Chinese GDP makes up 56% of Asia ex-Japan’s. Carbon notes that in 2011, Chinese investment grew by $336 billion, compared to the growth of only $260 billion in the entire US economy (investment plus government spending and consumption).

In 2011, Beijing took its foot off the gas pedal. This was partly to help transition the economy to a more consumer-oriented footing. It also reflected the political transition, which discouraged big infrastructure projects. A 30% reduction in investment caused China’s GDP growth to fall from 9.2% in 2011 to 7.5% in 2012. Carbon doesn’t expect the tap to open to the width of 2011, but it will expand, leading China to 8%-plus growth in 2013; if US and European growth rates beat expectations, exports can lift China to 9%. That in turn should help regional currencies and stock markets.

The flaw in Carbon’s argument is that he doesn’t ask whether this sort of approach is sustainable. China has managed the post-Lehman Brothers crisis very well, but Carbon does not take into account other factors that have changed since 2008, such as wages, labour competitiveness and demographics, all of which suggest the economy faces increasing headwinds. Protectionism remains a risk as well, particularly if China doesn’t find a way to ease political tensions with Japan.

Some economists do believe 8%-plus GDP growth is sustainable for a few more years. Nigel Chalk, head of emerging-market research at Barclays, says some of those factors should help China in the short run. He told the FinanceAsia and AsianInvestor Asia-Pacific Debt Forum last week that rising household incomes, as well as new government social policies to put income into peoples’ pockets, will help grow consumption.

How exactly this happens is hard to say, however. After all, consumption in China may only be 35% of GDP — far too little to power the ship — but it is growing faster than GDP, from automobiles to healthcare. The problem with Chalk’s argument is that consumption is incredibly fast-growing already. It cannot be expected to motor ahead, let alone prop up the economy.

Fiona Lake, senior global markets economist at Goldman Sachs, believes improved GDP growth rates are achievable because the government does have political control over the levers of the economy. “We do have faith in the ability of Chinese policymakers,” she said.

Freya Beamish

This is a question of belief, and some independent economists are atheists on the matter. Freya Beamish, an economist at Lombard Street Research, says China’s rapidly shrinking trade surplus with the US means its ability to maintain investment is finite. She says the current account surplus has almost vanished, from 10% of China’s GDP a few years ago to 2% to 3% today. That surplus has provided the liquidity behind investment splurges and credit expansion.

“China is running out of ammunition,” she said, predicting annualised inflation-adjusted GDP growth of 5% over the next few years.

One thing economists do agree on is that China’s government will prime the pump this year. There will be a kick to GDP growth, and that should have positive implications for the region. But only modest ones. If Chinese growth is indeed predicated on more internal demand, that suggests fewer exports from its neighbours.

More fundamentally, it seems that China, after flirting with policies to help the economy adjust to a more stable model, one that is more reliant on consumption, found this too hard. 2011 was a tough year (by Chinese standards at least; the rest of the world would kill for 7.5% growth) and that must have caused howls of protests from a range of insiders and vested interests. So it’s back to good old investment spending on infrastructure and construction. The further China moves from rebalancing, the harder the inevitable correction.

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