Is China's economy worse than it lets on? | DW News

Key Concepts:

• Overstated Growth: The idea that China's reported GDP growth figures are higher than actual economic activity.
• Investment-Led Economy: An economy where growth is primarily driven by investment in infrastructure and manufacturing, rather than consumer spending.
• Rebalancing: The Chinese government's long-term goal of shifting the economy towards consumption and away from investment and exports.
• Credit Growth: The rate at which new loans are being issued by the financial system, a key driver of investment in China.
• Structural Reform: Fundamental changes to the financial and fiscal systems needed to achieve sustainable economic growth and rebalancing.
• Deflationary Pressures: Downward pressure on prices, indicating weak demand and overcapacity in the economy.
• Local Government Debt: The significant amount of debt held by local governments in China, impacting their ability to invest and stimulate growth.

I. Discrepancy Between Official Data and Reality

• Main Point: Logan Wright argues that China's GDP growth has been overstated for the past three years, including 2024.
• Specifics:
  • Rhodium Group estimates 2.4-2.8% growth in 2024, while official figures and institutions like the World Bank and IMF suggest around 5%.
  • This discrepancy arises from analyzing sub-component data within China's official statistics.
• Evidence:
  • Significant slowdown in investment activity, particularly in the property sector and local government infrastructure.
  • Property construction is down 68% from its peak in mid-2021.
  • Credit growth to the non-financial corporate sector was only 5% in 2024, compared to 18% in the previous decade (2007-2016).
  • Consumption growth is weak, with retail sales growing at roughly half the previous year's rate.
  • Consistent weakness in consumer prices and nominal GDP growth.

II. Beijing's Actions and Their Implications

• Main Point: The extreme measures taken by the Chinese government to stimulate the economy suggest underlying weakness, despite official growth targets being met.
• Specifics:
  • Unprecedented actions to shore up economic growth and consumer confidence.
  • New consumer subsidy programs for autos and home appliances.
  • Mid-year budget adjustment in 2023.
  • Local government debt swap of 10 trillion yuan to free up spending.
  • Increased press conferences by ministries to announce economic support measures.
• Argument: These actions indicate that the economy is not operating in a "business as usual" mode.
• Evidence: Falling prices, widening trade imbalances (weaker domestic demand), and slowing nominal growth.

III. The Challenge of Meeting Growth Targets

• Main Point: China's insistence on maintaining high growth targets is driven by bureaucratic inertia and political considerations, but is increasingly unsustainable.
• Specifics:
  • GDP growth target is used to anchor expectations across the government.
  • Reducing the target could signal a lower priority for growth to local officials.
  • China aims to project its "inevitable rise" in the global economy.
• Argument: An investment-led growth strategy is becoming incompatible with global trade patterns.
• Explanation: As the largest source of global investment (28%), China can only grow relative to the rest of the world if other countries disinvest or reduce production. This is intensifying trade conflicts.

IV. Prospects for 2025 and Beyond

• Main Point: Growth in 2025 is expected to be modestly better than in 2024, but a significant gap between official projections and economic reality will likely persist.
• Specifics:
  • Modest cyclical improvement from the lows of 2022 (due to COVID-related disruptions and property market weakness).
  • It is difficult to see how China can generate 5% growth over the medium term.
  • Credit growth is structurally declining, and an investment-led economy depends on new credit.
  • Corporate profitability is under pressure due to deflationary pressures.
• Argument: China's financial system, already the world's largest, cannot sustain the high growth rates needed to significantly accelerate investment.
• Data: China's banking system has $60 trillion in assets, over half of global GDP.

V. The Elusive Goal of Rebalancing

• Main Point: China's stated goal of rebalancing the economy towards consumption has been a long-standing objective (since 2004) but has not been achieved due to the dominance of investment-led growth.
• Argument: High rates of investment growth, funded by the financial system, have made it difficult to shift away from this model.
• Constraints on Consumption:
  • Household income growth is the critical factor.
  • Sustainable increases in household income require fiscal reform and structural changes in taxation and redistribution.
• Analysis:
  • Short-term measures like subsidies and transfer payments have limited impact.
  • Long-term consumption growth is likely to be in the range of 3-4% in real terms, consistent with countries at China's GDP per capita level.
  • This translates to 1-1.5% of GDP growth from consumption.

VI. The Need for Structural Reform

• Main Point: Stimulus measures will have limited impact without more serious structural changes to the financial and fiscal systems.
• Constraints:
  • The financial system is heavily dependent on lending to the state sector and local governments.
  • Local government borrowing is roughly one-third of the banking system.
  • Redirecting loans to more productive uses requires cutting off these borrowers.
• Argument: Sustainable increases in household income require a redistribution of income within the global economy and restructuring of fiscal relationships within China.
• Conclusion: Structural reform problems have been long overdue, and attempts to initiate reforms have often been reversed.

VII. Prioritizing Technology vs. Economic Growth

• Main Point: Beijing's focus on technological dominance and reducing reliance on Western imports may be a security-oriented priority, but it is not necessarily a macroeconomic growth strategy.
• Argument: It is debatable whether Beijing prioritizes economic growth over security-related priorities.
• Evidence: The current growth strategy is not producing the rates of growth necessary to escape deflationary pressures, declining nominal GDP growth, and a declining share of China's economy within the rest of the world.

VIII. Notable Quotes:

• "China's economy... was unbalanced and unsustainable" - Wen Jiabao (paraphrased) in 2007, highlighting the long-standing recognition of the need for rebalancing.
• "...in the absence of real structural fiscal reform China's long-term consumption growth will probably be in the range of three to four percent in real terms" - Logan Wright, emphasizing the limitations on consumption growth without fundamental changes.

IX. Technical Terms and Concepts:

• Nominal GDP: GDP measured at current prices, without adjusting for inflation.
• Real GDP: GDP adjusted for inflation, providing a more accurate measure of economic growth.
• Trade Surplus: When a country's exports exceed its imports.
• Fiscal Reform: Changes to government taxation and spending policies.
• Disinflationary Pressures: A slowing down in the rate of inflation.

X. Synthesis/Conclusion:

China's official GDP growth figures likely overstate the actual economic activity, masking underlying weaknesses in investment, consumption, and credit growth. While the government is implementing stimulus measures, these are unlikely to achieve sustainable growth without fundamental structural reforms to the financial and fiscal systems. The long-standing goal of rebalancing the economy towards consumption remains elusive, and China's focus on technological dominance may conflict with its economic growth objectives. The future trajectory of China's economy hinges on its ability to address these structural challenges and shift towards a more sustainable and balanced growth model.