China’s GDP fuelling global demand, at least for now
Returning to a familiar refrain from the last decade, Chinese economic growth is clearly the pump of the global economy. Growing at an annualized 6.9% in the March Quarter of 2017, the Chinese economy appears to be experiencing accelerating growth. Those who have experienced increased trade growth into China may not be surprised by China’s improving conditions. However, there are plenty of indicators that the growth may be short-term.
Both real and nominal GDP rose in China in the last quarter, the latter to its highest level in two years, as the chart below shows.
It is very easy to consider China’s economic growth only in the context of its own performance. Certainly, this chart invites that comparison. But the reality is that GDP comparisons should be with other nations and not with China’s remarkable growth of the past.
At 6.9% annualized, China heads the pack of major economies and bests almost all by a considerable margin.
However, there is very little to endear this official Chinese growth rate, given its derivation.
China’s improving economic growth is multi-sectoral, but has, as ever, some alarming prospects, because even the official economic growth rate includes growth in the ‘informal’ sectors. Writing in the Financial Times in mid-April, Lucy Hornby commented that:
“The strength of China’s industrial sector was augmented by growth in Chinese credit — including shadow lending outside the formal banking sector — and a bullish turn in commodities that began last year.”
Analysts suggest that this is a quarterly spike that may not be repeated over the remainder of the year. They point to one-offs, like higher bank lending as investors race to beat credit tightening for dwelling purchases (sound familiar?), increased fixed asset investment, commencement of long-term construction projects and higher than normal retail sales growth.
Often considered inappropriate in other economies, government intervention in both macro and micro economic affairs is normal in China. Its role can be felt in this current growth in GDP.
Despite the significance of Chinese government involvement in the economy, debt is a key driver of the latest growth data, with the corporate sector holding most of China’s growing indebtedness. Debt sustained economic growth in China through a period of about four years during which official economic growth was, in some cases, severely over-inflated.
The chart below shows the continuing challenge of economic growth, from a sectoral perspective.
Efforts to maintain Chinese economic growth will need to be more robust and sustained if they are to pull its key sectors to higher growth, especially as credit tightening inevitably takes hold in coming months.