In recent months, bad news about China’s economy has continued to emerge. Even people who were generally optimistic have begun to worry.
In late May, Chinese people noticed that, without much fanfare, China’s National Development and Reform Commission (NDRC) rolled out a version 2.0 of its 4 trillion yuan (US$628 billion) stimulus package.
Although the NDRC tried to dampen the expectation for a new round of stimulus and denied that there is one being launched in 2012, the fact remains that there were 8,000 new industry projects from January to April.
Since early this year, the NDRC has already awarded generous grants for a lot of projects, including many large ones. The NDRC has also drastically sped up its evaluation process and approved grants for more than 100 industry projects in a single day on May 21, and for 328 additional projects in April—almost twice as many as in April of last year.
Signs of Economic Deterioration
However, we need to discuss what is ailing China’s economy in order to know if the injection of 4 trillion yuan is going to have any effect.
The biggest problem facing the Chinese economy is that it lacks new growth areas. The old “three carriages”—investment, export, and consumption—carrying China’s economy have long stopped working. But local governments still hope they can get one or two of the carriages moving again. However, since official statistics came out in May, more people believe that the “wolf”—after economists have cried wolf for so long—is indeed coming.
According to numbers released on June 9 by China’s National Bureau of Statistics, the Consumer Price Index grew 3 percent over last year. Yet the Producer Price Index fell to the lowest level in 30 months, indicating that the decline in demand in the real economy exceeded previous estimates.
Government statistics showed that in April, imports and exports both fell far short of expectations. Imports only increased by 0.3 percent from a year ago. Real estate investment only increased by 9 percent year on year, a 50 percent decline in the rate of growth compared to last year.
The Party mouthpiece People’s Daily said on May 22, “The three carriages of the economy have lost momentum,” quoting Xu Hongcai, deputy director of the Information Department under the China Center for International Economic Exchanges.
Xu said that the European debt crisis decreased foreign demand for Chinese goods, leading to a perceptible decline in Chinese exports. At the same time, wage increase, appreciation of the yuan, and rising costs of raw materials have all reduced the competitiveness of Chinese exports.
Even more worrisome is the slowdown in electricity consumption and the decrease of bank loans. Currently there is almost no increase in electricity generation, indicating slowing economic activity.
The Purchasing Managers Index for May, released by the National Bureau of Statistics and China Federation of Logistics and Purchasing, showed a significant decline to 50.4. The value 50 is considered the demarcation line between growth and decline in the manufacturing industry.
Data released by the Ministry of Finance on May 11 shows that due to a slowdown in economic and business profit in April, national revenue only increased 6.9 percent year on year, far less than the 18.7 percent growth reported in March, while economic expenditures showed a year-on-year increase of 8 percent.
Monetary Policy Alone Won’t Do
The reasons why some people in China believe the government can once again save the economy is because they believe that public debt is relatively low in China, and that the government has the ability to increase expenditures or reduce taxation in order to support economic growth.
However, these people have underestimated the level of public debt by far.
According to Liu Yuhui, government debt at the end of 2010 was estimated to be at US$4.1 trillion, or 68 percent of GDP. Liu is the director of the Financial Key Lab at the Institute of Finance and Banking, Chinese Academy of Social Sciences. He published these findings in China Securities Journal on May 21, in an investigation report conducted by his lab.
The article also said that as the demand for bank loans dwindled this year, the fundamentals of Chinese businesses’ balance sheets are far worse than in 2008, and the debt level of Chinese businesses is estimated to be 105.4 percent, which far exceeds the accepted level of 80 percent and is the highest among the 20-some countries examined by the investigation.
On May 26, during the United States-China Economic Forum in New York, Jim Chanos, renowned short seller and founder of the Kynikos Associates hedge fund, said that although China’s central government does not have much sovereign debt, he and his colleagues estimated that the overall public debt accrued by local government financing platform, state-owned enterprises and banks, the Ministry of Railways, and other government departments, as well as assets management corporations, was 180 percent of China’s GDP in late 2011.
In my article “The Tragedy of Public Investment,” I expressed concern that an excessive increase of public investment, i.e., government investment, will lead to further distortions in the industrial structure. The aftermath of the 5 trillion yuan infusion in 2009 will be repeated, and at the end of the day it will be the Chinese people who will again have to foot the bill. The Chinese public will be faced with higher taxation, continued high inflation, and some of the highest housing prices in the world.
This article was originally published in Chinese in the Taiwan-based Watchinese Magazine on June 21, 2012.
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