The Chinese economy appeared astonishingly robust last year. While, at 6.7%, economic growth in 2016 was lower than it has been for a good quarter of a century, it was only slightly down on the previous year’s growth of 6.9 per cent. As a result, the government was easily able to comply with the target range for economic growth introduced a year ago, which currently amounts to between 6.5 and 7%. Over the course of the entire past year, growth seemed to be almost “set in stone”, at 6.7%. According to official figures, it even seems to have accelerated slightly in the final quarter. As the Chinese Office for Statistics announced this morning, GDP growth was a little higher, at 6.8%, in the fourth quarter than in the previous quarters, meaning that it slightly exceeded market expectations. It was also the first time for two years that Beijing announced a slight acceleration in growth at all.
At least this means that the official growth figures are to some extent reflecting the improvement in economic activity that has been apparent in many early indicators for some months. Accordingly, sentiment in Chinese industry has brightened significantly since the middle of last year according to surveys of purchasing managers. Sentiment indicators reached their highest levels for roughly four years in the final quarter. Surveys by the People’s Bank of China also indicated increased optimism among companies over the course of the past year. Previously, survey indicators had pointed resolutely in one direction for years: downwards. And finally, the OECD early indicator for China, which primarily signals turning points in the economic cycle, is currently pointing to more buoyant economic growth.
We recently took the improvements in the various indicators as an opportunity to raise our economic forecast for China slightly. Growth will probably remain robust until well into the coming spring. The current data confirm this change of view. Previously we had assumed that the economy would rapidly fall back into the general downward trend. For the current year, we are now therefore assuming GDP growth of 6.4%, somewhat higher than our previous estimate of 6.2%. The global economy will also benefit from this development and is likely to grow somewhat more rapidly this year, at 3.1%, than previously thought.
Nonetheless, the slight improvement should not blind us to the fact that China has paid heavily for the economic revival with massive government intervention. Government investment activity increased considerably last year; growth in infrastructure investment surged and has more than doubled in the meantime. Tax rebates were granted for the purchase of small cars and it looks as though they have been used. The number of cars sold increased by almost 14% last year, which is faster than at any point in the last three years. Car production benefited from this, also expanding by 14% following a slight fall in the previous year. Residential construction has stabilised, supported by strong demand for owner-occupied apartments, which were boosted by government measures to make it easier to buy property.
The impact of these measures is still being felt. However, it is conceivable that the impetus of these measures will weaken over the rest of the year. The effect of government investment initiatives, in particular, will probably peter out halfway through the year unless follow-up measures are introduced. There are already signs of a marked slowdown. The situation is exacerbated by the fact that the fiscal measures significantly expanded the government’s budget deficit last year, meaning that it now stands at almost 5% of economic output. The tax relief on the purchases of small cars will not be so generous this year and is likely to depress sales and production of cars. And finally, Beijing reintroduced more stringent mortgage lending guidelines at the end of last year, which are likely to curb demand for property and consequently residential construction once more. Booming demand has resulted in the unpleasant side effect of rapidly rising house price inflation in numerous cities, which must be restricted as a matter of urgency.
Particularly in view of these risks to stability, which have increased steadily in recent years, the Chinese government would be well advised not to continue boosting the economy artificially but to allow itself more scope for lower growth rates. However, isolated comments from government circles are now hinting at this. In recent weeks, for instance, it has been stressed repeatedly that the general target of economic growth of 6.5% contained in the current five year plan, the thirteenth of its kind, does not have to be achieved in full if this will continue to increase debt to dangerous levels. At over 250% of economic output (BIS figures), total debt in China is very high for an emerging country. We therefore expect the government to reduce the targets for growth further no later than during the coming year when the team for President Xi’s second legislative term is determined. We only expect growth rates of below 6% then and an average figure for 2018 of 5.8%.