China_Report_Issue_51_August_2017

E COnOMY

As a result, additional earnings brought about by higher prices can
hardly generate as much investment and consumption as expected,
and long-term productivity declines.
There are several underlying factors that have caused the problems.
The first and largest one is the high debt ratio. Chinese enterprises
have accumulated massive debts to drive their business expansion.
Once the monetary policy is tightened, much of the additional reve-
nue earned from price hikes has to be spent on debt repayment which
has become more expensive. Investment is not an option. This is ex-
actly the case in China at present.
Secondly, the “virtual economy” has been siphoning off too much
money in recent years. A huge amount of capital is moving within the
financial sector and sloshing around the stock, bond and real estate
markets. Successive asset bubbles have been created. The situation is
particularly severe in the real estate sector. While real estate investors
have got more bank credit, investors in the real economy have got
less. In addition, households have to consume less when they have

borrowed a lot to buy housing.

Thirdly, investment by central State-owned enterprises is quasi-

fiscal spending in nature. It has crowded out local private investment.

In the more developed eastern areas, central SOEs’ investment has

attracted local private investment. The opposite happened in the less

market-oriented western areas. This seems also to be the case in small-

er places which are at much lower administrative levels themselves

than the central SOEs in their midst.

Fourthly, the old model of reform does not work any more. Local

governments were empowered to try reforms to compete for GDP

progress. This cannot be applied to the “new normal” which focuses

more on the quality than speed of growth.

Fifth, the potential for foreign trade expansion has been shrinking,

which in turn has restricted the progress of technological develop-

ment. By integrating into the world market, China has gained access

to new technologies and management expertise which contributed

a great deal to improving China’s productivity and narrowing the

0

3

6

9

12

15

Q1 2012 Q1 2013 Q1 2014 Q1 2015 Q1 2016 Q1 2017

Quarterly GDP growth in China

Year-on-year change in China’s consumer price index Year-on-year change in Chinese industrial enterprises with annual
revenue of US$3 million or above from their main business, since
September 2016 when the producer price index (PPI) saw an end to
the 54-month-long negative growth

nominal

Real

CPI

Core CPI (without food and energy)

PPI

Gross Profits

Source: National Academy of Development and Strategy, Renmin University of China

Source: National Bureau of Statistics of China Source: National Bureau of Statistics of China

0.0

0.5

1.0

1.5

2.0

2.5

Q1 2016 Q2 2016 Q3 2016 Q4 2016 Q1 2017 Q2 2017

-5

0

5

10

15

20

25

30

35

1-9/2016 1-10/2016 1-11/2016 1-12/2016 1-2/2017 1-3/2017 1-4/2017 1-5/2017 1-6/2017