Is China recovering?

The new gdp figure came in at 6.7%.  No matter what you believe “the real number” to be, this is probably more important:

Chen Xingdong, China chief economist at BNP Paribas, notes that first quarter growth was bolstered by industrial production, fixed-asset investment and an “astonishing” acceleration in construction starts while service sector growth moderated. That is exactly the opposite of what is supposed to be happening. “The pick-up in SOE investment and slowdown in private sector investment will cause problems for structural change,” Mr Chen said.

The first quarter this year also saw record credit expansion in China, even though most economists believe the country needs to be deleveraging. Here is David Keohane citing Wei Yao:

In Q1, increases in total credit exploded to CNY7.5tn, up 58% yoy and equivalent to 46.5% of nominal GDP – one of the highest ratios ever. Credit growth accelerated to 15.8% yoy to end-March, the quickest pace in 20 months.

Also from the FT (see the first link) is this:

Meanwhile, the “Mr Li got lucky” argument suggests that the most powerful player is not the country’s much feared president, Xi Jinping, but rather Janet Yellen, chair of the US Federal Reserve. According to this theory, Ms Yellen’s pause on US rate rises saved China from what looked like the beginning of run on the renminbi and Beijing’s foreign exchange reserves, which fell precipitously in January and February.

These falls moderated only after the Fed suggested it would not raise interest rates as aggressively as it had indicated late last year.

“The Fed’s reversal has taken a lot of pressure off the renminbi and without the currency looking like it’s going to collapse, people are feeling better,” said one Asian investment strategist, who asked not to be named.

The simplest China model for 2016 is this.  Due to the prevalence of SOEs and state influence in the economy, the country can in fact (for now) achieve almost any gdp target it wishes, at least within reason.  But it trades off the quantity of gdp for the quality of gdp, and this time — again — the Party opted for the relatively high growth figure.  That is bad news, not good news.

Here is an unpacking of some parts of the gdp number.  Here is Nerys Avery.


Comments for this post are closed