The Chinese economy grew at a rate of 7.8 percent in 2012, China’s National Bureau of Statistics announced in January. Commercial news media mostly greeted the announcement with a yawn, mainly because the growth data was basically in line with cynical expectations among most observers and analysts. As a China watcher, let me call attention to three key points on the data.
As for the first point, it should be noted that the Chinese economy, which slowed sharply last year, is said to have bottomed out and rebounded modestly in autumn. But did it really grow by a handsome 7.8 percent in 2012?
More to the point, were the growth rates for the second and third quarters, when news about how China’s red-hot economy was cooling down was splashed over the media almost daily, 7.6 percent and 7.4 percent, respectively?
Are Chinese economic statistics reliable? (AP file photo)
Investments in fixed assets in 2012, which are assumed to have contributed half of the 7.8-percent growth of the Chinese economy in that year, totaled 36 trillion yuan (536.15 trillion yen, or $5.776 trillion) in nominal terms, up 20 percent from the previous year, according to the National Bureau of Statistics.
The amount of fixed-asset investments grew sharply from 11 trillion yuan in 2007, before the collapse of U.S. investment bank Lehman Brothers triggered the global economic downturn in 2008, to 19 trillion yuan in 2009, when the effects of the 4-trillion-yuan fiscal stimulus package put together by the Chinese government kicked in.
The total of fixed-asset investments surged further to 24 trillion yuan in 2010 and 30 trillion yuan in 2011. The simple sum of the investments during the four-year period from 2009 through 2012 totals 110 trillion yuan.
The question is whether such a gargantuan amount of investments could really be financed.
According to the latest statistics by the People's Bank of China, the total of all bank deposits and bank loans is 94 trillion yuan and 67 trillion yuan, respectively, and among total bank loans, two out of five are short-term lending less than one year. Investors can seek other financing such as corporate bonds outstanding and assets in various investment trusts in China, which are growing sharply these days and are estimated at somewhere between 20 trillion and 30 trillion yuan.
These amounts are huge, however, the sum of the fixed-asset investments during the past four-year period is much larger.
If these fixed-asset investments have been yielding high returns, making it possible for investors to recoup their investments and repay their debts in two to three years, the money borrowed and invested in such assets in 2009 must have already been repaid and plowed back into new investments in 2012.
If such a virtuous cycle of investment and reinvestment is actually taking place, there is not much need to worry about investment financing.
But what is actually happening is the exact opposite.
Clearly, investments made in the past several years have been producing poor returns because an excessive amount of money was invested.
Consequently, a large portion of the debts incurred to finance these investments has only been refinanced to postpone paying back the principal. In addition, infrastructure investments made by local governments are believed to have generated no small amount of bad financial assets.
Another important question is this: Did the Chinese government conduct massive monetary easing last year to help finance the 36 trillion yuan of investments in fixed assets?
The answer is no. In 2009, when the 4-trillion-yuan stimulus package came into play, Beijing opted for an unprecedented scale of monetary expansion to finance the mammoth package. The move resulted in steep increases of about 30 percent in both the money supply and lending, while causing real estate prices to skyrocket.
Learning a lesson from the experience, the Chinese government has since maintained a relatively tight monetary policy. Chinese authorities kept their monetary policy stance unchanged last year, and the growth rates of money supply and lending were around 15 percent, or half of the 2009 levels.
All these facts suggest that the actual amount of fixed-asset investments made last year was far smaller than the figure released by the government--36 trillion yuan.
The suspicion is that the announced number was grossly inflated. Even if it is true that the Chinese economy improved slightly in autumn last year, it is hard to believe the government’s claim that the economy grew by 7.8 percent in 2012.
SHRINKING WORKING POPULATION
A second important topic concerning Chinese statistics is the decline in the country’s working population.
In a news conference early last year, the National Bureau of Statistics said the ratio of people aged between 15 and 59 to the overall population had dropped for the first time. One year on, early this year, the bureau announced the working-age population had started shrinking for the first time.
The release of such bleak data for two years in a row is a bit surprising, given China’s tradition of highlighting the bright side of things in announcing statistics.
That is probably because the bureau is seriously concerned about China’s future demographics. It believes that China will suffer a demographic disaster unless it abandons its one-child policy, which has been in place for three decades, as quickly as possible.
It is now fashionable among economists around the world to discuss the relationship between demographic trends and economic growth.
In its “Global Trends 2030” report, published late last year, the U.S. National Intelligence Council identified four overarching and inevitable “megatrends,” with one being “demographic patterns.”
The “Global Trends 2030” attracted media attention for its prediction that China will surpass the United States as the largest economic power by the year 2030. But the report’s forecasts concerning China should be taken with a grain of salt because it is based on demographic data about the country included in the “World Population Prospects” (WPP) compiled by the United Nations.
These data are unreliable. The WPP overestimates the birthrate in China. The national population census conducted in 2010 by the National Bureau of Statistics found the national average birthrate to be an extremely low 1.18--a figure that has never been recorded even in Japan, where the population of children is shrinking at a faster pace than in any other country.
The 2010 Revision of the WPP predicts that China’s population will peak in 2026 on the assumption that the current birthrate in the country is 1.51. This is clearly an overestimation.
But the 2008 Revision of the WPP was even worse. It assumed China’s birthrates to be 1.79 and predicted that its population would peak in 2032. The WPP has been used by experts around the world as the most authoritative and reliable source of demographic data. Most of the studies on the future of China conducted in recent years assumed that the country’s population would peak in 2032, according to the estimate in the 2008 Revision of the WPP.
Now, this optimistic view about China’s demographic future is being seriously challenged.
My own estimate simply based on a birthrate of 1.18 predicts that China’s overall population will peak in 2020. It is, however, important to take account of the fact that in China, where failure to comply with the one-child policy is punishable by fines, many people hide their children from the authorities when a census is taken. So the actual birthrate may be around 1.3 – 1.4, roughly the middle between the WPP 2010 estimate and mine. Even so, the Chinese population will peak nearly 10 years before 2032, the year when that was previously predicted to happen.
In economics, economic growth is explained by using three key factors--labor input, capital input and total factor productivity.
The aging of a nation’s population amid low birthrates works to depress not only labor input but also capital input (because the shrinking workforce and the growing ranks of pensioners reduce savings in the nation). The era when China is able to unsparingly pour huge amounts of savings into inefficient infrastructure projects is passing.
With its negative demographic trends beginning to take a toll on its economy, China will soon find itself grappling with the burden known as “demographic onus.”
The statistics bureau appears to be concerned that a further delay in the political decision to drop the one-child policy would have dire consequences for the nation’s economy and society.
Both China and the rest of the world have been betting that the Chinese economy will continue expanding at annual rates of 7 percent or higher for more than 10 years. But that view is too optimistic. Personally, I’m convinced that the day when China’s gross domestic product surpasses that of the United States will never come.
XI JINPING'S SHENZHEN VISIT
A third point that merits discussion here concerns China’s benchmark stock index. The Shanghai Stock Exchange A Share Index kept trending downward even after an upturn of the economy was declared in autumn last year. After the Communist Party announced changes in the top echelons of leadership at its 18th Party Congress, it hit the bottom at 2,050 at the end of November.
The market was apparently disappointed at the seven new appointments to the party’s all-powerful Politburo Standing Committee. The presence of many conservatives among the seven new members of the supreme policymaking body doused expectations of reform among investors.
But the stock market then began a sudden rally since early December, with the benchmark index rising to 2,350 by the end of December, back to its level of June last year. The latest earnings reports of listed companies, however, don’t indicate any strong recovery in sales and profits that justifies the stock market run-up late last year.
Securities analysts say what drove up the stock market was fresh expectations of reform raised by remarks by China's new leader, Xi Jinping. Xi, who was appointed as the party’s general secretary at the congress, spoke repeatedly about the importance of promoting reforms and fighting corruption. Moreover, as the first place for a party secretary to visit, Xi chose Shenzhen, a coastal city where Deng Xiaoping started the "Reform and Opening" policy, which choice was interpreted as a sign to accelerate reform. It was just after the news of Xi's Shenzhen visit came out when the stock market began a rally. Xi's actions made many stock investors less pessimistic about the outlook of reform in China, according to the analysts.
The market is sensitive to the strength of the new administration’s commitment to reform because of the perception that China has gotten trapped in a vicious circle due to the “Guo Jin Min Tui” phenomenon, which means the state advances as the private sector retreats, and the growing power of vested interests. Many Chinese now think there will be no future for the nation’s economy without decisive reforms to break up vested interests.
Investors are paying much less attention to economic growth figures that may not reflect the reality, than to clues to whether the Xi administration will embark on the reforms needed to enable the nation to break through the prevailing sense of hopelessness.
That’s the current picture of the Chinese economy that emerges from various signs and anecdotal evidence found on the street.
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