No matter how fast or slow China is growing, don’t cheer nor mourn13 April, 2012, 1:59. Posted by Zarathustra
Tags: Economy, Hard Landing
China will be publishing its GDP growth figures within hours. I am sure that a better-than-expected growth rate would trigger waves of cheering that the concept of a hard landing is bunkum, while a worse-than-expected growth rate would trigger comments that the end of the world is nigh, but fear not: there will be easing.
The problems China is facing are complicated. While I have already discussed that at great length on my Chinese economy 2012 and beyond series, further readings and thoughts give me further insights.
The first one, as I briefly elaborated a few days ago, is that while population ageing should force working age people to spend as dependency ratio rise, that will be offset by the fact that this group of spenders will be a shrinking group going forward, making the idea that consumption growth will greatly outpaced the rest of the economy is very problematic. I have also pointed out that given the over-building in the real estate market (see all these empty properties in Hainan, Shanghai, and more), and given that many households store their wealth in real estate, the burst of the real estate bubble (which is happening right now, I believe) will be hugely negative to consumption as their wealth shrinks. One positive thing to consumption, as I have discussed previously, is that population ageing will sooner or later lead to labour shortage, that might push wages up, but I will discuss below some doubts from my second thought.
To approach the question on future wage growth, we start by giving some thoughts on the corporate sector. On the corporate sector, the pessimistic view on consumption will mean that one should cast serious doubt on corporate profitability as the top-line revenue growth will be, on the whole, disappointing. Indeed, corporate earnings for Chinese companies have been very disappointing for the year 2011, so disappointing that only view of the macro-oriented people would have expected that (including myself, which is partly lucky). But at the same time, we also have to acknowledge the fact that part of the disappointment on the bottom-line arose from rising wages in the past few years. The question here is whether wages will continue to rise rapidly that it might have a chance of supporting consumption growth more strongly in the years to come.
If we do not assume increase of government expenditure and trade surplus, I think there will be a number of forces pulling in different directions. First, as said, the labour shortage should exert upward pressure on wage, which will be good for consumption (and that is the bullish argument for consumption as the size of middle class grows). Second, the propensity to consume out of income for working-age population will rise, but this group is going to be a shrinking one, so the overall net effect could end up be rather neutral. Third, the wealth effect on the consumption function, which will be hugely negative. At the same time, the shrinking wealth from the burst of real estate bubble will feed in negative impact to wages through reduced consumption and poor corporate profits. While it is difficult here to pinpoint exactly how the end result would be given this rather qualitative discussion of a stock-flow consistent kind of thinking, it is fair to say that the combined impact of wage and consumption will at best be neutral, and I would lean towards the negative side.
Over-investment in the economy is evident in various sectors, and with lower private consumption, companies will find themselves in a situation where they have more inventories and fixed asset than they would like to given the poor consumption demand. Investment, which has been the key growth driver for the economy (particularly in the last 2 or 3 years), will slow dramatically given lower demand, and that will be negative both for GDP growth as well as consumption growth.
As you can see, no matter what GDP growth rate currently is, the above problems are still there for the years ahead. The more reflections are done, the more likely it seems that China’s GDP growth will slow to 5% or less by the end of the decade given above issues. Of course, one could argue that the Chinese government can run a huge budget deficit to plug the gap, but that could mean running trade deficit going forward, and that will in no way solve the problem of over-capacity within the economy, thus I am not a fan of huge deficit spending for the sake of maintaining GDP growth, even though there is chance that it is a possible solution.
To conclude, whatever the GDP growth rate might be at the present moment, the problems confronting the country is so huge that economic growth rate will be slowed down to way below what people think is possible, no matter what.