If You Look at These Charts, You Know China’s Growth Model Is Over
The real number of China’s GDP growth will remain a mystery. There are some other official numbers, however, which make it very clear that China’s model of generating growth through investment has run its course.
After the financial crisis in 2008, China ramped up spending on infrastructure and productive capacity to maintain GDP growth higher than 10 percent. To this day, fixed asset investment—private and public—makes up almost 50 percent of total GDP, or $5 trillion dollars.
This basically means digging up a whole lot of earth and putting in nice, shiny things like bullet trains. What do you need to dig up earth? Right, excavators, tons of them.
In the heydays of investment spending, the country bought almost 50,000 excavators in a single month. Since January 2014, however, this trend is officially over. Excavator sales volumes are down 38 percent for the period spanning January to November 2015, compared to the same period in 2014, according to research by Goldman Sachs.
So maybe China now has enough excavators and doesn’t need to buy new ones, but is still using the old ones? No. Excavator utilization hours declined 7 percent in October 2015 compared to last year. This is better than the -50 percent drop in January of 2015, but utilization hours are far off the highs reached in 2011 and 2012.
Another important indicator tracking the 50 percent of economic activity is freight railway traffic. It’s down 12 percent from January to November 2015 compared to the same period last year. Locomotive train sales are down 4.6 percent from January to September before recovering a little bit in October.
Overall infrastructure spending improved a little bit in November, growing 10.2 percent in November 2015 compared to a year ago and 9.4 percent in October 2015. This includes electricity, gas, water, transport, storage, postal, and water conservancy.
Looking at the longer-term trend, this looks like a dead-cat bounce rather like a sustainable bottom. And it comes at a price. China has previously chosen state banks to funnel money into investment projects, boosting bank assets from $10 trillion in 2009 to $30 trillion in 2015. Since then, loan growth has also slowed down as banks are hitting balance sheet constraints.
The last straw is fiscal spending, and both the national and local governments have been running fiscal deficits averaging $100 billion for the last three months. Expenditure increased 18.9 percent from January to November 2015 compared to the same period last year.
Local governments have also taken full advantage of the debt swap program and ramped up issuance of bonds as well. Goldman estimates local governments and their financing vehicles have issued $620 billion in debt this year.
Because the much anticipated shift to a consumer economy remains elusive, China has and is using every method possible to shore up growth: fiscal spending, interest rate cuts, devaluing its currency, and boosting its stock market.
If you were looking for a sign that China is getting desperate, this is it.