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Correctly Assessing China’s Current Economic Growth

May 05 , 2016
  • Yi Xianrong

    Researcher, Chinese Academy of Social Sciences

Recently released figures show that China’s GDP in the first quarter grew by 6.7%, better than market expectations. In particular, many figures from March are very encouraging. For example, domestic fixed-asset investment grew by 11.1%, higher than 10.2% from January to February; infrastructure investment increased by 19.6%; investment in real estate development grew by 6.2%; production of large-scale industries grew by 6.8%, the highest level since last June. In large-scale industries, the cement output rose sharply by 24%. Auto and steel industries also increased 8.9% and 3.3% respectively.

The market cheered at these figures, believing than China’s economy had begun to bottom out and rebound. Just think, the GDP of the US and European countries grew less than 2% while China’s GDP was approaching 7%, three times greater. So it is absurd to predict that China’s economy will have a hard landing. However, the cheering about China’s economy is mixed with worry now.

Although GDP growth in the first quarter hit the target set by the government, it again took the old road: Intensive infrastructure construction and excessive credit expansion were used to push up prices in the real estate market and the home prices like in the past years. That is to say, the GDP growth in the first quarter mainly came from increased government infrastructure construction and home sales boosted by surging home prices. China’s GDP growth fueled by these sectors could continue for one year or so but not constantly and may even create a bigger problem.

First, the domestic fixed-asset investment growth improved in the first quarter but the growth mainly occurred due to the increased large-scale infrastructure investment, the increased investment of the State-Owned Enterprises and the increased real estate investment. However, the fixed-asset investment of private enterprises decreased instead of increasing. In the present situation, the private enterprises are not optimistic about domestic economic prospects and are unwilling to increase investment. As to the large public infrastructure investment, it is all right to increase some investment, for this investment will always have a long-term effect, but two issues must be solved. The first is whether the government can support it; the second is how the investment with a low return can be supported. If the government finance fails to give support, many issues will arise. For instance, now the high debt of local governments is a huge potential risk in China’s financial market.

Meanwhile, the government has supported the real estate market through excessive credit expansion. The recent figures show that new loans in the first quarter of the year rose to 4.61 trillion yuan. New loans for real estate accounted for 1.5 trillion yuan, of which new personal home mortgage loans increased to 1 trillion yuan. The total social financing in the first quarter was as high as 6.59 trillion yuan, 3 trillion yuan of which flew to the real estate market. These are all-time high figures. It not only indicates that credit expansion this year is more excessive than even in 2009, but also highlights that the capital from that expansion did not flow to the real economy but rather to real estate.

In fact, the GDP growth was led by rising home prices because of the excessive credit expansion. In the first quarter, home prices in 62 out of the 70 large-and-medium sized cities rose over the same period while home prices in the first-tier cites went unprecedentedly crazy. For example, home prices in Shenzhen rose by 62% over the same period. Besides, total national home sales in the first quarter increased over one time faster than the saleable home area.

All these figures show that, to a large extent, the current home market in the first-tier and the second-tier cities revived because of the fast-rising home prices and because of the speculative manipulation by many home owners taking advantage of the preferential household mortgage loan policies and preferential tax policies, rather than a real demand for more housing. If any city has rising home prices, home speculators have been flooding into that market and make home prices skyrocket. But for almost a year, for those third-tier and fourth-tier cities where home prices did not increase, because investors did not enter these cities despite low home prices and no matter what bailout policies the government had taken, the housing market of these cities remained stagnant and the housing inventories could not be digested.

However, if the housing market is manipulated only by speculators, in the current situation where many cities have very high prices, the crazy home speculation in these cities will continue to make a bigger price bubble. Of course, these cities will have rising home sales in the short-term and the home supply will be quickly replenished, then the real estate market will boom and GDP can go up. But, this real estate market boom is not only unsustainable, it also will ultimately squeeze out buyers seeking a place to live instead of short-term economic gain. Social consumption only grew by 10.3% in the first quarter, lower than last year’s figure of 10.7%, and the negative effect is very clear.

So, China’s current economic situation is that the downward pressure of GDP growth has eased a bit and the economy has rebounded somewhat mainly because of government’s investment in the infrastructure and the real estate speculation while the domestic residential demand is not so satisfying. Therefore, there is obviously a mixed picture about China’s economy.


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