Debt Rears its Ugly Head in Chinese Economy
May 17, 2017

Q1 economic growth in China was forecast at 6.8%, but the actual figure came in at 6.9% on April 17, 2017. For the quarter ending in March, Chinese GDP grew at a year-on-year rate of 6.9%, up 0.1% from Q4, 2016. Those GDP growth figures were largely the result of increases in fiscal spending, higher retail sales, and greater industrial output. For 2017, the GDP annual growth rate has been on the up and up so far, but recent events have given pause to the rally in China.

In April this year, the Chinese economy stumbled. The Chinese government has been working extremely hard to prevent China from falling into a debt trap. Several key industries in the country reported weaker performance including investment, retail sales, and factory output. One of the drivers of economic uncertainty in China is speculative financing – cheap credit. The authorities in Beijing have wised up to the risks inherent in this type of economic growth paradigm, and they are rejecting it across the board.

How Is Chinese Government Policy Impacting Economic Performance?

Figures from January through April 2017 indicate that there is lacklustre performance in the Chinese economy. This is evident in the April fixed-asset investment levels which are lower than predicted. That the world’s second-largest economy is now enduring manufacturing sector weakness is not an encouraging sign. Policymakers are not yet at a point where they are deeply concerned about the performance of the Chinese economy. In other words, there is no urgency to dramatically change direction.

For example, factory production in March 2017 was up 7.6% year on year, while that figure dropped to 6.5% in April. From January through March, fixed asset investment was at 9.2%, while the January through April figure was 8.9%. This all indicates that there is a decline in China’s economic performance through April. Part of the reason why the Chinese economy is stumbling is commodity prices. Iron ore and steel prices are weakening on the back of higher inventory levels and weak demand. Recall that the Chinese government instructed its mills to churn out massive quantities of steel to push production quotas.

Can the Chinese Government Prevent Asset Bubbles from Developing?

Where China scores heavily is infrastructure expenditure. April figures reflect a 23% increase year on year, despite fixed asset investment declining to 4.9% (from 5.8% January-March 2017). The Chinese government is more concerned with asset bubbles developing than it is with a slowdown in specific metrics. The People’s Bank of China has raised the short-term interest rates to relieve debt burdens from the economy.

One of China’s most troubling risk factors is the high speculation on real estate. There have been reports of increasing Chinese credit card debt over the years, prompting a sharp increase in debt consolidation options for everyday folks. Increasing debt levels are commensurate with rising standards of living in China. The burgeoning middle class is placing greater demands on itself with housing, education, travel, investment, and entertainment. This is especially noticeable in the property market.

The asset bubble that is fast developing in that sector is raising eyebrows in China. In April for example, a huge uptick in property development took place, despite slowing sales growth. The problem for China is in retail sales which was down 0.2% in April, now at 10.7%, compared to March. It is the slow pace of growth in domestic consumption and weak external demand that is precipitating a slowdown in economic growth in China. For the full year, the PBOC is anticipating a GDP growth rate of 6.5%. The debt-fueled stimulus policies that are driving Chinese growth will likely be addressed in short order.

By Contributor