E COnOMY
I
n the first half of the year, China’s economy sustained steady
growth. The nominal growth rate, which does not take price
changes into account, had been creeping up for several quarters
in a row. This is thanks partly to the domestic supply-side structural
reform, and also to improvements in the world economy.
However, deep problems in China’s economy linger, and have be-
come evident in very different ways across many facets of the econom-
ic operation, showing increasing divergences within the economy.
Blocked
Prices as measured by the consumer price index and producer price
index have rebounded fast since 2016. As a result, nominal GDP
growth accelerated. It reached 8 percent in the fourth quarter of
2016, and 11.8 percent in the first quarter of 2017, the fastest since
the first half of 2012. By contrast, price-weighted real GDP did not
grow as fast as the nominal rate. It hovered at 6.7 percent during the
last three quarters of 2016, and went up slightly to 6.9 percent in the
first quarter of 2017. It means the nominal price increase has not been
fully turned into real GDP growth.
Historically, a price hike is a precursor to real GDP growth. This
is because price hikes typically generate more revenue for companies
and strengthen their financial position. Investment and consumption
are then boosted, and the two demands stimulate production output
- the real GDP. However, in this current cycle, real production output
may lag farther behind the nominal output. When such a gap peaks,
the upward growth trajectory begins to go down. This is why the
nominal GDP increase being much faster than the real GDP growth
may indicate the end of this round of economic rebound.
Meanwhile, external demand is getting stronger as a driving force
for growth. The global economy, particularly that of the US, is recov-
ering, and growth prospects have improved. In the first half of 2017,
China’s exports grew faster than widely expected, which boosted do-
mestic industrial production. In the first quarter of 2017, the driving
force of the US and European economies was shifting to investment
from consumption. The strong investment there bodes well for Chi-
na, the world’s largest exporter of capital goods which are used for
production. Chinese exporters of mechanical and electronic products
will benefit from this.
This may not last long. China has nearly completed its quest of
winning orders from other suppliers on the developed market. Now
China’s share of the developed market is no longer expanding as fast
as before. New opportunities from tapping emerging markets cannot
make up for the loss of momentum in developed markets for China.
The long-term trend is that China’s export growth will slow. The con-
tribution of exports to China’s growth will be much more limited
than it was between 2003 and 2008 [when China, as a new WTO
member, enjoyed fast rising exports to developed markets whose de-
mand was driven by strong economic growth].
Investment in infrastructure and real estate will be restrained to
some extent by existing policy. It is not certain how much the private
investment sector will recover, but it is not very likely that it will be
strong enough in the short term to make up for China’s shrinking
infrastructure and real estate investment. Fixed asset investment as
a whole is under pressure. In terms of consumption, the constant
slowdown of residents’ income does not support strong consumption
growth.
Our conclusion is that China’s economy reached another rock bot-
tom between the end of 2016 and early 2017. It has stabilised there
despite some fluctuation. The GDP growth for the whole year of
2017 is forecast to be about 6.7 percent, with inflation, measured by
the consumer price index, at two percent.Structural Dilemmas
The biggest issue to be addressed in China’s economy is structural
dilemmas. The policy has tightened. This could make it even more
likely for risks built up during the economic downturn to be un-
leashed. New problems are emerging during the period when con-
ventional engines are weakened and new ones are gaining ground.China’s Economy
divided
Additional cash flows generated from price hikes have not boosted investment and
consumption as much as expected. What’s blocking the channels?
By Liu Fengliang