The Economist - UK (2022-06-04)

The Economist June 4th 2022 Finance & economics 67

40 high-ranking officials atlgfvs have
been put under investigation or detained
since the start of the year. The Ministry of
Finance has warned provincial authorities
about the risks associated with corruption
in the quasi-state sector. The renewed at-
tention on graft at lgfvs betrays growing
concerns about the role the companies
play in generating economic growth, along
with the piles of debt they have amassed in
the process.
lgfvs are a uniquely Chinese problem.
Invented in the 1990s to get round rules
that banned local governments from rais-
ing debt, the companies became one of the
most important sources of economic
growth over the past two decades, as they
carried out vast numbers of public pro-
jects. Their status as non-government en-
tities allowed them to borrow heavily from
investors in China and abroad. One of the
oddities of lgfvs is that it is city and pro-
vincial authorities that are on the hook for
those debts. But lgfvs’ borrowings are not
included in official government budgets,
making it hard to gauge risk.
The latest scrutiny brings with it two
complications. For a start, it comes at an
awkward moment. The economy has been
hit hard by recent lockdowns to contain
covid-19. In response, China’s leaders have
announced plans for infrastructure spend-
ing this year to help achieve a lofty gdp-
growth target of 5.5% (see Free exchange).
lgfvs would typically play a key role in
funding and contracting much of the
building activity across the country. But
the crackdown on corruption and other re-
strictions means that managers will be less
likely to take risks. Normally this would be
considered a good thing. This time, how-
ever, an unwillingness to take on new pro-
jects could come at the cost of precious
gdpgrowth at a time when the Communist
Party can ill afford it.
Moreover, tighter oversight has had the
unintended effect of exposing lgfvs to
currency risk. The firms must gain regula-
tory approval to issue bonds within China.
Greater scrutiny over their use of funds has
led to onshore-debt issuance by lgfvs fall-
ing by 22% in the first four months of 2022,
compared with the same period last year.
This has pushed the companies into the
riskier offshore market: dollar-bond issu-
ance by lgfvs soared by about 150% during
the same period, according to Pengyuan, a
rating agency. But few of these companies
earn dollar revenues, making it harder to
repay the bonds. A default would send a
shock wave through the bond market.
Such dangers explain why Beijing’s
technocrats want to reduce the importance
of lgfvs, especially as local governments
can now issue bonds directly, reducing the
need for fiddly workarounds. For as long as
the growth target is in peril, though, lgfvs
will be going nowhere. 

Consumer spending

Balance of payments

A

sked recently about Amazon’s

sprawling network of warehouses, Bri-

an Olsavsky, the firm’s finance chief, did

not mince words. “We have too much space

right now.” As consumer demand surged

during the pandemic, the online retailer

doubled its capacity from 193m square feet

(18m square metres) at the end of 2019 to

387m square feet two years later. Today it

has a glut, which the company says is cost-

ing it tens of millions of dollars a day.

Retailers are bracing themselves for a

slowdown as central banks raise interest

rates. But Amazon’s troubles reflect anoth-

er crucial development for the global econ-

omy: a shift in spending from goods back

to services, reversing a pandemic-era

trend. This switch should ease pressure on

global supply chains and lower inflation.

But it has been slow and uneven.

Confined to their homes during the

worst of the pandemic, consumers in the

rich world splurged on appliances, cars

and furniture. The binge was most notable

in America, where it was fuelled by three

rounds of “stimmy” cheques. People

bought substitutes for the services they

could no longer enjoy—an exercise bike,

say, to make up for closed gyms. Perhaps as

a result of having a little extra cash, they al-

so treated themselves to things like watch-

es and luxury products. A year into the

pandemic, the composition of consumer

spending had changed dramatically. By

spring 2021, goods accounted for 42% of

household spending in America, up from

36% before the pandemic; services ac-

counted for 58%, down from 64%, a drop

worth more than $900bn per year.

Several other Western countries experi-

enced a similar rise in goods consumption,

though few witnessed a bigger boost than

America. Daan Struyven and Dan Milo of

Goldman Sachs, a bank, compare the evo-

lution of goods spending in real terms

across 23 oecd countries. America outper-

formed all but two. The latest data from the

oecdsuggest that the Nordic countries al-

so splurged. On average, though, they

spent about 5% more on goods in 2021 than

pre-pandemic trends would have suggest-

ed, compared with 10% in America.

The spending spree, where it occurred,

helped lift economies out of recession. But

it also contributed to an inflation head-

ache. A deluge of new orders overwhelmed

global supply chains, which were already

strained by pandemic-related disruptions,

leading to clogged ports and shipping de-

lays. With demand outstripping supply,

goods prices rose. America’s Bureau of La-

bour Statistics reckons that goods prices

boosted consumer-price inflation by 4.9

percentage points in the year to April 2022,

having reduced it by 0.1 points in the 12

months before the pandemic.

Now spending is starting to shift in the

other direction. Data published on May

27th showed that spending on goods fell in

the year to April, and is now 9% above its

pre-pandemic trend, down from a high of

16% last year. Spending on services is up by

7% in the same period, and is just 3% below

pre-pandemic trends. But some services

have been quicker to recover than others.

Messrs Struyven and Milo of Goldman

Could a shift from goods to services ease inflation?

Back on the streets

Switchback

United States, consumer spending , $trn

2012 prices, annualised

Source: Bureau of Economic Analysis

9

8

7

6

5

22152010

Services

Pre-pandemic trend

4

3

2

1

0

22152010

Goods

Non-durable

Durable