The challenges for China’s new leadership
The 2013 NPC and CPPCC Annual Sessions have ended with the formal selection of China’s new leaders. Not surprisingly there were few surprises. My quick take is that the leadership is saying all the right things, but they have been saying these things for quite a while – nearly two years in the case of Li Keqiang, the new premier.
The constraints they face, however, have neither changed nor been addressed. First, any real rebalancing means much slow growth than Beijing seems willing to tolerate. Second, the groups (“vested interests) that have benefitted from the old growth model remain very powerful and very reluctant to allow any erosion of the benefits they have accrued.
Two weeks ago, in his last formal State of the Union speech as China’s premier, Wen Jiabao announced that the 2013 growth target for China’s economy was 7.5 percent. Here is the Xinhua article on the speech:
A growth target of 7.5 percent and a greater focus on consumption and economic reforms were some of the goals set out by Premier Wen Jiabao in a keynote address on Tuesday. An inflation target of 3.5 percent was set, below the 4 percent target of 2012, Wen said in his last Government Work Report to the National People’s Congress. The growth target is the same as last year’s, when GDP increased by 7.8 percent from a year earlier, a 13-year low. Economic growth in 2011 was 9.3 percent and 10.4 percent in 2010.
Until 2011 China’s economic growth easily exceeded the target set by the government, but something strange happened this year. For the first time that I can remember, after issuing the target growth rate for the year, Premier Wen seemed to warn that the target would be difficult to attain. More specifically, he acknowledged that there was “growing conflict between downward pressure on economic growth and excess production capacity”.
A few days later Zhang Ping, head of the NDRC, reiterated the concerns about overcapacity. According to Xinhua,
Addressing surplus production capacity is a major part of efforts to adjust China’s economic structure and transform its pattern of development, a senior economic official said Wednesday. Zhang Ping, head of the National Development and Reform Commission (NDRC), the top economic planner, said China as a manufacturing powerhouse has a serious overcapacity problem in some sectors.
The industrial sectors suffering most from overcapacity include steel, cement, electrolytic aluminium, plate glass and coal coke sectors, which are operating at 70 to 75 percent of their total capacity. Emerging sectors such as photovoltaic and wind turbine manufacturing have also shown excess capacity, with a 60-percent and 70-percent utilization rate, respectively, Zhang told a press conference held on the sidelines of the annual parliamentary session.
According to widely accepted international standards, normal market competition features 80 to 85-percent utilization of production capacity. “Under market economy conditions, a modest surplus production capacity can stimulate competition in the market and promote technical and management progress,” said Zhang. But in China, steel and cement industries are facing great difficulties due to overcapacity, Zhang said, adding that half of the companies in the electrolytic aluminium sector suffered losses last year.
China, in other words, is producing far more of everything than it can absorb or export, but the only way to keep growth high has been to invest even more, at least part of which creates even greater production capacity. This is what will make attaining the growth target difficult. The policy with which Beijing has been able to keep growth high for so many years has itself become a problem.
Do you believe the GDP numbers?
We may have gotten a taste of what this means when we consider what happened in 2012. Last year China’s official growth rate was 7.8%, above the 7.5% target but the lowest number in many years and far lower than the more than 10% growth rates China had generated for the past two decades. Much lower growth in 2012 suggested that rebalancing the Chinese economy, a goal that has been actively proclaimed since at least 2005 but which had never happened until 2012, was proving to be more difficult than expected.
But even with the lower growth numbers throughout the year economists were puzzled by evidence that the economy was in fact growing more slowly than the official numbers suggested. Energy consumption in China, for example, usually grows more quickly than GDP, but surprisingly, in 2012 energy usage grew by only 5.5%, well below the official growth rate of 7.8%. Other indicators also indicated that growth may have been lower than the official numbers suggested.
While some of the sell-side economists still insist that China’s growth remained high and healthy enough, in fact among independent economists who specialize in the Chinese economy, both among Chinese and foreign economists there has been growing skepticism. A consensus is developing that China grew by less that 7.8% in 2012. For example Stephen Green at Standard Chartered, one of my favorites of the sell-side economists, refigured his numbers and guesses that instead of 9.3% for 2011 and 7.8% for 2012 (the official numbers), actual growth might have been 7.2% for 2011 and 5.5% for 2012. Other economists are suggesting even lower numbers, closer to zero.
I don’t have my own estimates because it seems to me that all of these attempts to measure economic growth are actually measuring economic activity, which may itself overstate growth. If you spend $100 million each on two separate bridges, one of which is actively used and the other rarely used, the official measures will have them contributing the same amount to GDP, even though the former creates real value and the latter does not. In either case if you then adjust the overall GDP numbers downwards by examining electricity usage, cement consumption, and so on, as the likes of Stephen Green do, you may end up with a more accurate estimate of economic activity, but you still treat the two bridges as contributing the same amount.
It isn’t until you write down the debt associated with the second bridge that you end up with a more meaningful measure of GDP. Of course this makes the whole process very confusing and it is hard to compare different estimates. It isn’t always clear how these estimates are reached, but as far as I can tell nearly all, if not all, of the downward revisions provided by various skeptical economists are still measures of economic activity, and do not include estimates for debt write-down associated with unnecessary investment.