By the way, China isn’t rebalancing

By the way, China isn’t rebalancing

Kate Mackenzie

| Jul 17 13:09 | 14 comments | Share

Stephen Roach recently wrote for Yale Global Online arguing that yes, rebalancing is happening, but the new leadership have it under control because they are enacting the necessary reforms to facilitate this transition. A quick look at the composition of second quarter growth statistics suggests that is not happening — at least not now. INET’s China Economics Seminar summarises the composition revealed at the National Bureau of Statistics press conference on Monday: […]the spokesman of the NBS told reporters that overall consumption contributed 45.2% of GDP growth in the first six months of 2013 while investment’s contribution still stood well above half at 53.9%. Net exports contributed the rest at 0.9%. Consumption’s 45.2% is the lowest proportion since 2010, as consumption contributed 55.5% and 51.8% of GDP growth in 2011 and 2012 respectively.The WSJ’s China Realtime blog points out that other proxies for rebalancing don’t look much better.

Retail sales in the first half rose 12.7 percent year-on-year, a slower rate than the 14.4 per cent for the first six months of 2012.

Disposable income growth for urban households slowed to 6.5 per cent in the first half compared with 2012, down from 9.7 per cent growth in the first half of 2012. Stephen Green of Standard Chartered points out that this measure actually improved significantly in the second quarter after contracting in the first quarter — which is kind of, maybe, reassuring? Okay, so it’s improved recently. But it’s rare to see growth rates turn negative in China.

In any case, we’d say it is way too early to make a call on what the new leadership will do regarding rebalancing. There are some promising signs for sure, such as refraining from stimulus, declaring war on corruption, and tentative moves to relax energy price controls. It’s far from clear whether they are willing or able to do everything that’s needed, such as tackling the power of the SOEs. Comments such as these from Li Keqiang yesterday are vague at best, and at worst hint at an unwillingness to tolerate growth falling much further. Not necessary a good thing, considering how difficult it would be to maintain the recent growth rates if the role of investment in growth actually slowed substantially.

However Green, a respected China watcher, has some thoughts about what might be next. He believes credit growth — a key driver of investment — has probably peaked, but a dramatic slowdown in growth is unlikely in the second half of this year. A big stimulus, he says, is also unlikely, but a “some targeted supports” will probably be rolled out in the second half:

The supports will likely be targeted at small and medium-sized enterprises (SMEs), “strategic” industries (e.g., energy saving, environmental protection, IT) and consumer spending, in line with China‟s long-term reform goals. The “Guidance on Finance Supports to Economic Reforms” issued by the State Council a week ago suggests that one avenue for support is regulatory fine-tuning. For instance,

The risk weighting on loans and the loan-deposit regulation could be adjusted to motivate banks to lend more to certain industries.

Government SME loan insurance funds could play a more active role in offering guarantees on bank borrowing by smaller companies.

Big infrastructure projects will receive government support to raise funds in the bond market.

Banks are being encouraged these days to offer maximum discounts on mortgage loans to first-time homebuyers.

Premier Li has also called to boost low-quality housing reconstruction; supports for the energy saving, environmental protection and IT industries; and investment and consumption.

If the slowdown continues to worsen, Beijing could look to cut banks’ required reserves and interest rates, and boost fiscal spending. But on balance, we do not see this happening in Q3.

Though some of these sound commendable, we’re struggling to see how they lessen the dependency on investment for growth, or do much to boost consumption.