The world’s second-largest economy is going to make a hard landing one day, China watchers have speculated for several years. The fact is, though, the Middle Kingdom already is well on its way.
Let’s first examine the “official” top-line numbers. In 2007, a year before the great global crisis, China’s real gross domestic product expanded at a 14.2 percent clip. Last year, it grew at 6.9 percent, representing a 50 percent decline.
The official GDP figures are increasingly suspect, however. China often releases its quarterly figures just two weeks after the end of the quarter.
This is remarkable, given a nation of 1.35 billion and the fact that the government doesn’t make any revisions. Growth estimates “conveniently” fall within Beijing’s target range.
Most importantly, credit growth continues to outpace real GDP growth by significant margins. In other words, China’s short-term growth is being pumped up by even more borrowing.
China’s aggregate debt (mostly corporate and government) is approximately 300 percent of GDP, a figure that surpasses that of the United States. Much of this debt is short term in nature and being used to roll over existing debt.
The corporate sector has experienced particular stress, with debt recently soaring as China has continued to prop up its state-owned enterprises. The percent of income used by China’s companies to service their debts has doubled since the 2008 global crisis.
The Bank for International Settlements, a collection of the world’s central banks, released data last week illustrating the explosion of Chinese debt. The bank stated that China’s credit-to-GDP gap stood at 30 percent, the highest of any country since it began collecting data in 1995.
Moreover, the current official GDP figures appear overstated, although the economy isn’t contracting given credit infusions. Growth in both industrial output and retail sales has slowed despite the credit stimulus.
Private investment has grown by only 2.1 percent year-to-date. It accounts for 60 percent of total domestic asset investment, the largest source of growth in the Chinese economy.
The biggest sign of the slowdown in China’s domestic growth: imports, which fell 12.5 percent in July. This definitively shows that domestic spending is shrinking quickly.
So how fast is the Chinese economy actually growing? It’s difficult to say, given the lack of transparency in the statistics. But it appears likely that growth is in the neighborhood of 4.5 to 5.5 percent.
Not quite a “hard landing” yet, but the makings of one seem well on the way.
