5 CHARTS OF CHINA’S GROWTH CONUNDRUM
By Rohan Clarke, Data Diary
When you think about it, the imminent spike in mining related investment and its impact on Australian GDP is a pretty fair reflection of what has been going on in China for some time. Martin Wolf recently opined on the sustainability of China’s GDP growth without the government sanctioned infrastructure binge (here). It’s the Jim Chanos view of the world, ease off the building and things don’t just slow, they go into reverse pretty quickly. The following charts hint at what’s at stake:
1) The importance of infrastructure investment (Gross fixed capital formation) in driving China’s GDP growth over the last decade is self-evident:
2) And even more simply stated as a proportion of GDP:
3) So it is clear just how difficult is the task is to migrate the driver of GDP growth from investment to consumption.
4) Still that is why China is forecasting GDP growth closer to 7% for the next 5 years – it’ll be weaning the economy off the debt financed infrastructure spend ever so gradually:
5) But the risk is that the problems have already been conceived – China’s financial system is pregnant with debt that has financed investments that will prove uneconomic if the rate of GDP growth (and the attendant asset price inflation) slows.
Looked at from this perspective, it has remarkable similarities to the debt overhang that persists in the developed world – and the resulting underperformance of financial equities from New York to London and beyond.
What I don’t understand here is that all these “analyses” seem to overlook China’s next 5 year plan. Which, much to chagrin of all the chicken littles, calls for more expansion and building.
I am all too aware that this kind of growth is not sustainable long term. But in the short term, i.e., 10 years +, I think that the massive migration will continue and thus China’s needs will be on the same path.
When the country is holding trillions in reserves, I would respectfully submit that the debt problem is not the same as the developed world, not by a million miles.
There is no obamacare in China, no medicare. NO entitlement programs sucking the life out of the country.
Therein lies the difference.
not bullish on china in the short term but the chinese consumer has no balance sheet recession (and even if property values collapse many of those properties were purchased by the upper class with cash). the challenge is getting the chinese consumer to spend and perhaps little inflation that erodes yuan spending power maybe just the thing they need.
One other point, going long the Aussie and Canuck currency against the dollar or Euro pairing is going to be a FANTASTIC bet, imho.
China wants to move millions more people in to its cities. They build residences, transportation infrastructure and factories for these people to work in.
The problem is there is a deficit of world consumption. The US consumer is tapped out. If/When the US government reduces its deficit that will come directly off total world consumption. This is replicated in many other places with too much government debt, household debt or both.
If the world does not consume enough to justify all these new Chinese factories, the factories, infrastructure and residences will turn out to have been poor investments. Even though we have an excess production capacity worldwide, China continues to massively miss-allocate these investments. Their central planning will continue to cause world imbalances for years to come. US businesses, with lost of cash on their balance sheets see the current lack of customers and they are not over-expanding their capacity. Long term: Bullish US / Bearish China.
They have the same issue as the US only more acute…a growing disparity between the haves and the have nots.
Chanos has been right from the beginning, China is a mess. There is no such thing as a soft landing after having pumped up your GDP with as much liquidity as they did. They have not crashed yet , but their markets are on a downward ski slope.
If China crashes, they could always put the unemployed into war production. The only real limit is energy supplies.