China’s economy has been rolling downhill for several successive quarters but thanks to some skilled piloting by policymakers between April and June, the juggernaut looks like it is finally taking a turn onto more stable terrain.
Official data flooding newsrooms on Wednesday showed GDP rising 7.5% in the three-month period, the first improvement in quarterly growth for three quarters. That was above the widely held consensus of 7.4%, the rate achieved in the previous two quarters. Other important indicators support the view that stabilization is occurring. Industrial production growth picked up more than expected to 9.2% year-on-year in June from 8.8% in May. Fixed asset investment growth edged up to 17.3% from 17.2%.
While this is welcome, China’s leaders should be careful not to pay too high a price to arrest the slowdown. Senior officials talked earlier this year of accepting a slower pace of growth in order to alter the balance of the economy and make it more sustainable. High-digit expansion over more than a decade created worrying structural issues that haven’t been properly addressed.
Yet the methods used to push up Q2 growth reinforce the prospect that Premier Li Keqiang and his fellow planners are going to do everything they can to hit a 7.5% annual growth target for 2014, even if that means putting off key reforms. Signs of this emerged last month, when Li said “China’s economy needs to grow at a proper rate, expected to be around 7.5% this year.” Critics of set growth targets say they are an unwelcome remnant of the planned economy era and must be abolished or else will continue to distract officials from the reform process.
The spirit, if not the practise, of the slight recovery also shows just how hard some bad old habits are to kick. Since April, China has selectively loosened reserve requirement ratios for certain banks to get more money into the real economy, cut banks’ loan-to-deposit ratios to boost lending and brought forward spending on shanty town renovations and railways.
Whatever catchy name is ascribed to these measures, such as “fine-tuning” or “mini-stimulus,” and no matter how useful they have been in ticking the economy over in the short-term, they hark back to the days of credit and infrastructure spending that the current administration admits its needs to move away from. Last summer, a similar mini-stimulus was also rolled out.
Looking to later this year, economist mostly see the government continuing to loosen monetary, fiscal and property policy further – largely in order to chase what is essentially an arbitrary political goal. “With a high comparison base, Beijing needs an average 2%-2.1% quarter-on-quarter growth to deliver the 7.5% annual growth target, and there are still strong headwinds as a consequence of the anti-corruption campaign and property downturn. So we expect Beijing to continue its mini-stimulus program in coming months,” Bank of America Merrill Lynch chief China economist Lu Ting said in a note on Wednesday.
Yet the very success of the “mini-stimulus” in pushing growth to within target levels may herald some positives. For one, it should convince officials that they do not need to reach for bigger fiscal levers to shore up growth in times of trouble, thus avoiding throwing the economy off the slow-track to reform. It’s not quite going cold turkey, but an important first step nonetheless.
Government spending has also shored up construction, a major employer.”Today’s figures show that migrant wages, which should have been most affected by the weakness in the property sector, are still growing at a double digit rate,” Julian Evans-Pritchard, a Singapore-based economist with Capital Economics, wrote in a note on Wednesday. As long as there are enough jobs around to keep China’s 171 million migrant workers in employment, officials will rest easier. Planned infrastructure works should generate sufficient work for at least a year.
What happens in the remainder of this year poses a crucial test for the economy in 2015 and beyond. Even if officials don’t panic and deploy a full-on fiscal arsenal, it’s hard to see where growth will continue to come from. The mini-stimulus has its limits. “However, without new organic growth drivers, the current ‘mini-stimulus’ uplift measures may not last long, as proved by last year’s experience,” said Tao Wang, an economist with UBS in Hong Kong.
Outside of the mini-stimulus, the economy was given a boost by other drivers that cannot be relied on longer-term. A number of Chinese cities including Hohhot, Jinan and Xiamen have eased property curb policies that limited resident property purchases. Exports also provided a gentle boost in June, but their share of the economy is steadily on the decline.
“More importantly, the gradual unfolding of China’s structural property downshift will deal an increasingly negative hit to growth, with more and more industrial sectors starting to feel the second round effect towards year-end,” Tao said in a note on Wednesday. A downturn in the property industry, which can account for up to 30% of GDP when including various sectors, according to Standard Chartered, is seen by most economists as the biggest risk in 2014.
Fixed-asset investment in real estate edged down to 14.1% in June from 14.7% in May while new home starts growth decreased to -13.8% year-on-year in June from -12.0% the month prior, official data released on Wednesday showed. The sector is giving out worrying signals.
Officials tasked with driving the Chinese economy have pulled into the middle lane. They need to open their newly-printed maps that set a course for a road of slower, sustainable growth. If they don’t, a few wrong turns and that downward path will come into full view again.