China: Slowing, But Still Growing

For all the fears about China’s debt load and slowing growth, The Wall Street Journal’s Tom Orlik contrasts China’s still-booming economy with those of Japan, Europe and the United States, and says that its debt situation is actually improving:

In 2011, China’s gross domestic product came in at 47.1 trillion yuan ($7.4 trillion). That represented nominal growth of 17.5% from 2010, a blistering pace which makes many of the problems of debt and credit that trouble investors and hang over valuations for Chinese stocks appear a little more manageable.

Take local-government debt. The government’s own auditor put the end of 2010 number at 10.7 trillion yuan. In 2010 that was equal to 26% of China’s GDP. In 2011, it had already shrank to 22%. Even if weaker demand and reduced inflation mean a slightly lower nominal growth rate in 2012, by the end of the year it could have shrank to 19%. Local-government debt may also be creeping up, but not enough to push the ratio in the wrong direction.

Investors also worry about China’s credit binge, which saw the ratio of loans to GDP soar from 96% at the end of 2008 to 119% at the end of 2010, as loan growth ran way ahead of GDP. An expanding economy means that ratio is also moving in the right direction—down to 116% in 2011. That smaller reduction in the ratio reflects the fact that banks’ loan books continue to expand, though not quite as fast as GDP.

Indeed, better-than-expected December manufacturing data and GDP growth have indicated a soft landing for China’s economy and helped to rally global markets in early 2012. In addition, Forbes points out that commodity demand from China continues to exceed expectations. Still, writes The Economist, key indicators suggest that the makeup of China’s growth is changing:

China still runs a sizeable trade surplus. But its net exports fell in 2011 (in absolute terms) for only the third time since 2000, subtracting 0.5 percentage points from its growth. Thanks to home-grown spending, China’s economy still managed to expand by 9.2% in 2011, remaining surprisingly strong even in the fourth quarter. This growth owed an unusual amount to consumption (both public and private), which contributed over half for the first time since 2001. As a consequence, the share of consumption in China’s GDP edged up in 2011 after falling for ten years in a row.

The mainstay of China’s growth remains investment, on which its economy remains worryingly dependent. Indeed, when China’s critics are not bashing it for overexporting, they bash it for overinvestment in property. Its housing boom is, however, slowing markedly. China this week reported that the price of new homes fell in 52 out of 70 cities across the country in December, compared with the month before. Households are struggling to obtain mortgages; developers are finding it almost impossible to obtain a loan. The drying up of foreign funds is particularly dramatic, points out North Square Blue Oak, a research firm based in London and Beijing. Foreign capital fell by 65% in December, compared with a year earlier.

The flight of foreigners from property partly explains another unusual twist in the China story. Its foreign-exchange reserves fell in the fourth quarter for the first time since the height of the Asian financial crisis in 1998. The drop was small, from $3.2 trillion to $3.18 trillion, but also a little mysterious. China still exports more than it imports, and attracts more foreign direct investment than it undertakes. These two sources of foreign exchange must, then, have been offset by an unidentified drain.

The worry is that China’s capital controls have sprung a leak. “Hot money”, attracted by the country’s growth, may be flowing out as the property market falters. Some even speculate that China’s rich may begin to smuggle their new-found wealth out of the country en masse.

The Diplomat’s Rajiv Biswas also speculated on the possibility of a “Goldilocks Landing” – not too hot, not too cold – as China enters 2012.


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