In the second quarter of 2010, China posted 10.3 percent growth in its gross domestic product (GDP) over the same period a year earlier.[i] This is against reported 11.9 percent growth in the first quarter of 2010. The slow down rate of 1.6 percent point marginally exceeds FactSet survey.[ii] Chinese Premier Wen Jiabao attributed the development to macroeconomic policy.[iii] It possibly included phasing out of the $586-billion stimulus spending, tightening curbs on lending and checking spiralling property prices.
The glib in the argument of the Chinese Premier betrays his stand on the issue in the past, when he constantly called for arresting the slide down. It broadly speaks of the dilemma of the Chinese decision makers. The Chinese economy was presently beset with phenomenon of what has come to be known as ‘yo yo depression’.[iv] It was an outcome of China’s development model, and broadly held prospect of adversely affecting the momentum of global economy, albeit differently and diversely. The king pin of the destabilizing factors constitute the looming spectre of high inflation and high unemployment, largely an outcome of heavy and reckless public spending and lending that has led China to the precipice of bubbles in giant housing, infrastructure and manufacturing.[v]
For most part, the development has not surprised the knowledgeable sections. It has not been unwelcome either. Sheng Laiyun, spokesman for the National Bureau of Statistics, was candid when he said: “The slowing will help our economy avoid overheating and assist in the transformation of our economic model.”[vi] Notwithstanding, it has sent shudders into the spine of a large number of stake holders who held hopes against hope in China’s capability to sustain the global economy.
The paper is aimed at getting to understand the fault line in the cooling off process of the Chinese economy. While the slides in the momentum of the Chinese economy is a fait accompli, and going by Linda Yueh, fellow in economics at Oxford university, the Chinese economy was bound to slow further ‘throughout the rest of the year’.[vii] Nevertheless, as per World Bank report, China’s economic growth was slated to moderate to an average of 7 percent during 2016-2020. All this apart, it is undisputable that the Chinese economy would continue to expand, at each stage and from year to year.
The scholarships in the field have been discussing the likelihood of soft and/or hard landing from the record high rate of expansion. The degree of aplomb about the net outcome again tends to vary quite widely. Conceptually, the slow down can be sector specific and/ or spread over to all sectors with varying degree of intensity. The paper is, accordingly, organized to focus on: GDP Growth and its Inter-Industry Compositions; Inherent Potencies and Strategic Weaknesses; and, the Outlook of Course Correction. The assumptions of the study included: the liberal fiscal and easy monetary policy, responsible for insulating the Chinese economy against cascading effects of global down turn, has since lost shine and hence, China had limited policy instruments at hand to initiate meaningful ‘midcourse correction’; and, the Chinese economy awaited overhaul of its structure before it could roar again as it did in the past couple of decades.
GDP Growth and its Inter-sector Compositions
In the first half of 2010, China’s gross domestic product (GDP) stood at 17.284 trillion Yuan (US$2.553 trillion).[viii] It is 3.7 percentage points higher over the same period 2009. The contribution of the primary, secondary and tertiary sectors ran respectively to 1336.7 billion Yuan (US$195.9 billion), 8583.0 billion Yuan (US$1258.5 billion) and 7364.3 billion Yuan (US$1079.8 billion). The three sectors thus contributed respectively 7.7 percent, 49.7 percent and 42.6 percent.
Inherent Potencies and Strategic Weaknesses
Theoretically, the phenomenon of cooling off as much as exponential growth has to be constricted and/or spread over to primary, secondary and tertiary sectors individually and/ or overall. Again, the cooling off as much as exponential growth of the Chinese economy has but to run through individual and/ or over all changes in the marginal product of labour (MPL) in primary, secondary and tertiary sectors in relative perspective of their size.[ix] The incidence of the change in the MPL in individual and/ or overall perspective would again run through marked downward and/ or upward change effects in different constituents of three sectors. By the same logic, the relative size of the components of different sectors holds importance. In China, the Primary sector consists of agriculture, animal husbandry, forestry and fishery (State Statistical Bureau of China 1990b). The secondary sector includes manufacturing, mining, constructions and utilities. The rest of the industries are classified as tertiary.
The share of the primary sector in the first half of 2010 has been miniscule 7.7 percent. In over all perspective, it has but to be 10 and odd percent of the total GDP of China.[x] In the slow down count of the growth rate of Chinese economy as such, the share of the primary can not be so pronounced. This is, not withstanding the fact that the impact will be tell tale one for a variety of reasons, in particular as 39.5 percent of the Chinese labour force depend on primary sector for their living.[xi] The total output of summer grain was 123.10 million tons, a decrease of 390 thousand tons, down by 0.3 percent. As the NBS data bears out, the total output of pork, beef and mutton reached 37.13 million tons, a year-on-year growth of 3.5 percent. There is little statistics available about forestry and fishery. It is yet safe to presume these two components of the Chinese primary sector did not have significant bearing in the slide down.
As the Chinese official data release bear out, the total value added of the industrial enterprises above designated size was up by 17.6 percent year-on-year, or 10.6 percentage points higher than that in the first half of 2009. An analysis of different types of enterprises showed that the value added growth of the state-owned and state holding enterprises went up by 17.7 percent; collective enterprises by 10.2 percent; share-holding enterprises by 18.8 percent; and 17.0 percent growth for enterprises funded by foreign investors or investors from Hong Kong, Macao and Taiwan provinces. The year-on-year growth of heavy industry was 19.4 percent, and 13.6 percent for the light industry. Among 39 industrial divisions, 38 of them registered year-on-year growth. In terms of different areas, the growth in eastern, central and western regions was 16.7 percent, 20.7 percent and 17.6 percent respectively. The production and sales of industrial products went on well. In the first half of this year, the sales ratio of industrial products was 97.6 percent, or 0.4 percentage point higher than that in the previous year. Nevertheless, the profits made by industrial enterprises above designated size stood at 1,539.7 billion Yuan, up by 81.6 percent year-on-year. Among the 39 industrial divisions, 36 divisions registered year-on-year increase in profits, 1 division reversed from loss-making to profits, and the rest 2 divisions witnessed reduction of profits. This speaks of a scenario, somewhat synonymous to ‘hidden sluggishness’, borne of a mix of endogenous and exogenous factors at work.[xii]
Nevertheless, during the first half of 2010, the total value of imports and exports, which, for long, until beaten by the global financial crisis and consequent global economic down turn, accounted for nearly 37 percent of the Chinese GDP and has been the driving force in China’s economic ascendance, was worth US$ 1,354.9 billion, up by 43.1 percent year-on-year. Here, the value of exports was US$ 705.1 billion, up by 35.2 percent, and the value of imports was US$ 649.8 billion, up by 52.7 percent. The trade surplus was US$ 55.3 billion.[xiii] The May 2010 export surge, much of which was but laid on an artificial edifice, contributed to the upswing for the period in question, though down by staggering 5.4 percent from the peak of 48.5 percent.[xiv]
Quite notably, the growth rate of investment in fixed assets came down. The investment in fixed assets amounted to RBM11. 4187 trillion Yuan (US$1. 67 trillion), up 25% year-on-year, of which urban fixed assets investment was RMB 9.8047 trillion Yuan (US$ 1.43 trillion, up 25.5%, down 8.1 percentage points from the same period 2009 and down 0.9 percentage point compared with the previous quarter.[xv] Rural fixed assets investment, in the bargain was just RMB1.61 trillion Yuan (US$ 0.23 trillion up 22.1 percent from a year earlier but, again, down 8 percentage point from the same period 2009. There was saving grace that the central and western region attracted sizeable investments as part of policy instrument, where it grew by 28.0 percent and 27.3 percent respectively as against 22.4 percent in the eastern region.
As a result of various tightening measures of credit creation, in particular, phasing out the $586-billion stimulus spending, tightening curbs on lending and bringing in check spiralling property prices, the growth rate of money supply witnessed staggering drop. The ghost of bad loans has as well been at work for the scenario.[xvi] By the end of June 2010, the balance of broad money (M2) was 67.4 trillion Yuan, narrow money (M1) 24.1 trillion Yuan, and, cash in circulation (M0) 3.9 trillion Yuan. It broadly stands at the back of looming liquidity crunch in the Chinese economy.
The point that the secondary and tertiary industries contributed largely to the slow down stands testified from noticeable fall in purchasing manager’s index. While estimates vary, and in some respect, quite significantly, the message is yet both loud and clear: inevitable slow down, well neigh portending the end of an epoch of exponential double digit expansion. The deduction draws on several concomitant developments including the onset of discernible drop down in purchasing managers’ index (PMI).[xvii] I have no dispute with Zhang Liqun, a Senior Research Fellow at the Macro Economic Research Department of the Chinese State Council Development Research Centre, who sought to label the phenomenon as being “steady slowdown”, something of the nature, if not the order of “leveling off after the climb”.[xviii]
In June 2010, the Chinese PMI, worked out by the China Federation of Logistics & Purchasing (CFLP) stood at 52.1, compared to 53.9 in May 2010.[xix] The result, as such, missed a 53.1 consensus forecast in a Reuter’s poll of economists, but managed to stay above the 50 mark separating expansion from contraction. For July 2010, CFLP estimates go to record anther notch to China’s PMI to 51.2.[xx] The reading is close to the median forecast of 51.1 in a Reuter’s poll of 11 economists. A rival survey for June 2010, carried out by HSBC in association with market research firm Markit, had reported China’s PMI at 50.4, down from 52.7 in May 2010. HSBC estimates for July 2010 is yet to be made public. The possibility of the Chinese PMI falling under 50-mark can not be outright ruled out. The index hit a record low of 38.8 in November 2008 and was last below 50 in February 2009.
Chinese National Bureau of Statistics (NBS) has since attributed the phenomenon to external factors, in particular to European debt crisis. It does acknowledge the role of home factors except withdrawal of export tax rebates. The HSBC data showed manufacturing output declined in June 2010, ending 14 months of expansion. New business orders taken by manufacturers fell for the first time in 15 months, a distinct turnaround from conditions in the first quarter, even though the downturn was slight. The index measuring new export orders as well ended 12 months of growth. It fell under the 50-mark. [xxi] The affliction of phenomenon is more serious than what most reputed studies in the filed have thus far indicated.
Plausible Horizon of Course Corrections
The prospect of the slow down of the Chinese economy gathering momentum is past testing of null hypothesis. In June 2010, industrial production experienced a surprisingly sharp slowdown to a growth rate of 13.7%, down from 16.5% in May 2010. The latest release of the People’s Bank of China (PBOC) seem to fairly realistic. While it discounts the prospect of China suffering a “double dip”, it gives credence to a continued spell of slow down in the Chinese economy. The lesson is, otherwise, writ large. The horizon of high growth can not be limitless.
Qu Hongbin, HSBC’s Hong Kong-based chief economist, estimated China’s economy to expand 9% on an annualized basis in the second half 2010.[xxii] Ardo Hansen, the World Bank’s lead economist for China, says that the rate of expansion of the Chinese economy during the second half will be a bit still softer. The World Bank research suggests that China’s annual economic growth rate will fall to an average of 7 per cent in 2016-2020.
The ‘soft landing’, leave aside the prospect of much discussed ‘hard landing’ of the Chinese economy for the present will have multi dimensional aftershocks. It has already uunnerved all those who expected China to help sustain the global economy from the nose dive. It could also put Beijing under domestic pressure to unwind some of its recent tightening measures, especially in housing. It was important to avoid the spin effects on a range of other industries say, from steel to electrical appliances. Indian exports, in particular iron ore could suffer slight cuts in the light of decline in the appetite of China for iron and steel productions.
(The writer,Dr. Sheonandan Pandey is an eminent analyst based in New Delhi.Email:firstname.lastname@example.org) References:
[i]State Council Information Office Press Conference, telecast on CCTV News, July 15, 2010.
[ii] FactSet estimated growth rate of the Chinese economy at 10.5 percent. Accordingly, the Chinese economy was expected to slow down by 1.4 percentage point as against 1.6 percentage point now.
[iii] In his meeting with the visiting German Angela Merkel on July 16, 2010, the Chinese Premier Wen Jiabao said the slow down of the Chinese economy during the second quarter of 2010 was primarily due to the government’s active regulation and control. http://english.peopledaily.com.cn/90001/90862/7068929.html
[iv] The terminology ‘Yo Yo Depression’ has of late been coined to describe an economic environment where the economy moved violently every year or so from inflation to deflation.
[v] Inflation in June 2010 dipped 0.2 percent from 3.1 per cent in May 2010. Inflation rate refers to a general rise in prices, measured against a standard level of purchasing power. The most well known measures of inflation are the CPI, which measures consumer prices, and the GDP deflator, which measures inflation in whole of the domestic economy. The measure of unemployment rate in China follows distinctly to their definition of labour, which constitutes of the number of people employed plus the number of unemployed but seeking work. The non-labour force constitutes of those who are institutionalized and those serving the military.
[viii] http://www.chinadaily.com.cn/china/ 2010-7/15/content_10110093.htm
[ix] The division of the economic activities into primary, secondary and tertiary sectors originally came from Clark (1940) and Fisher (1939).
[x] In 2009, primary sector contributed 3.54 trillion Yuan to total GDP of 33.53 trillion Yuan. The secondary and tertiary industries contributed respectively 15.69 trillion Yuan and 14.29 trillion Yuan respectively. As such, the share of the primary, secondary and tertiary sectors to China’s GDP comes to 10.5%, 46.8% and 42.7% respectively.
[xi] The total labour force in China runs to 812.7 million. The primary, secondary and tertiary sectors of the Chinese economy employed 39.5 %, 33.2 % and 27.2 % respectively of the total Chinese labour force.
[xii] Zhong Guo Jinji Wang (China Economic Net), http://en.ce.cn/Business/Macro-economic/20100715_21617868.shtml
[xiv] For details, see my paper, “China’s Export Surge and the Debate”, ISN ETH Zurich, 19 July 2010 http://www.isn.ethz.ch/isn/digital-library/publications/details?id=118954
[xv] Fixed asset investment (FAI) is China’s main measure of capital spending. It is not part of GDP but is a main source for deriving fixed capital formation (FCF), and hence, more often than not used as something of a harbinger for the welfare of the Chinese economy.
[xvi] By the end of June 2010, the amount of outstanding loans of all financial institutions in China stood at RMB44.6 trillion Yuan, a large part of which constituted bad loans. They included high risk RMB 7.7 trillion (US$1.1trillion) LGFV (local government financial vehicles) loans, accounting for 16 percent of all loans.
[xvii] PMI reflects the percentage of purchasing managers in certain economic sector that reported better business conditions than in the previous month. A PMI index over 50 indicates that the economy is expanding while any thing below 50 means that the economy is contracting. Ever since the Institute for Supply Management in Arizona pioneered the practice right in 1948, it is in vogue. The index is popular in detecting both inflationary pressure and manufacturing activities. The data collection is quite broad based to 400 purchasing managers in the manufacturing sector on five different fields such as, production level, new orders from customers, speed of supply deliveries, inventories and employment level and hence, quite dependable.
[xx] http://online.wsj.com/article/ BT-CO-20100731-700847.html
[xxii] In his estimate, Qu Hongbin takes into account China’s current policy of containing inflation. He accordingly believed that the China would not go for another dose of stimulant, and hence, further slow down of the Chinese economy could not be ruled out. Qu Hongbin contends the estimates suggesting melt down of the Chinese economy.