What's the Status of the Chinese Economy?
The past two months have been an interesting time in China. The stock market’s gyrations made global headlines and renewed hand-wringing about the slowdown in the Chinese economy have become part of global growth concerns. And then Beijing was chosen for the 2022 Winter Olympics.
The first thing to recognize is that the local stock markets in China are largely disconnected from the reality of the economy. Unlike mature markets, retail investors dominate the market and the near-tripling of the Shenzhen index and 150% increase in the Shanghai exchange from mid-2014 until mid-June meant that nearly every conversation, with colleagues or taxi drivers, centered on huge fortunes made in the market. Businesses complained that employees were spending more time looking at the internet ticker than working. All this rise in the stock market occurred after the rest of the world was already wringing its hands about the slowdown in China’s economy. The facts support a view that the local China stock markets are more a casino than investment.
China’s consumers are huge savers and they lack investment opportunities. Over the past decade, real estate has been a favored investment, but the government’s continuing efforts to restrain real estate speculation motivated the consumer to turn his/her attention to the stock market. Money poured in and created what most outside observers recognized as a bubble, fueled also by purchases on margin. When market bubbles pop they pop loudly. The government now is trying to support the market or at least promote stability, in order that the average latecomer to stock investing not lose their life’s savings. So now, market moves are driven by speculation on whether the government’s actions, including stock purchases, can succeed. Continued uncertainty and probably volatility seem in store.
More interesting is the performance of the real economy. China has been growing more slowly—7.7% in 2013, 7.3% in 2014— than its several previous decades of double-digit growth. The government has set its target for 2015 growth at 7% and the first two quarters were reported at 7.0%. The government exerts a very large influence on the economy through massive infrastructure investment and control of state enterprises, and the slowing was deliberate and planned. The goal is to take a breath, reduce dependence of the economy on government-sponsored investment, move away from low-cost manufacturing for export, and focus on improving the lives of consumers. Anyone who has been to Beijing in recent years knows that environmental protection needs attention. And other sectors such as medical services are now booming. At the same time, it is important that growth be maintained in order to provide jobs and higher living standards for the large population of people who haven’t been the winners in the remarkable growth to date. Achieving the “new normal” growth without downturn is a balancing act. The government’s management of the past decades of high and steady growth was impressive, but was accomplished by investment largely under its control accounting for half of GDP, far higher than other countries, developing or mature. Scaling down this percentage is both deliberate and needed, but it risks the government losing a main level of control over the macro economy.
Those who follow manufacturing-centered indicators—like power demand, purchasing managers’ reports, and transportation— question whether the economy is growing at the reported 7%; their skepticism is reinforced by the economy growing precisely at the target. The sectors of the economy that are strongest such as services are measured with less certainty, but a trip last month across the Chinese interior was convincing that there is a great deal of visible economic activity taking place in regions formerly left behind. Investment has been de-emphasized, but is far from flat, as evidenced by projects across the countryside from new airports to new cities to new high-speed rail lines to subway systems, as well as new commercial and industrial construction. Economic activity in the countryside and outside of manufacturing is measured with less precision than we have seen in China in the past, but the growth seems no less real.
Speaking of investment, most wondered how Beijing, with no mountains, almost no snow, and choking pollution could have been the choice to host the 2022 Olympics. The simple answer is that China will spend what it takes over the next 7 years to prepare. The skiing events will be far away from the city, and new high-speed rail lines will be built. Relying totally on snow-making in the dry region will probably be controversial, but seems not to be of concern. The investment in constructing half the facilities (using some facilities from the 2008 Summer Games) will give a boost to the economy, even if it runs counter to the government’s macroeconomic goals. Patriotism and health will now both drive clean-air initiatives. And, in a country largely without knowledge of winter sports, consumer spending could get a boost and Yao Ming was probably only half-joking when he said he might start a winter sports company.
From home a block away all the building should at least be fun to watch.