The Economic Cycle looks for a hard landing in China
Guilin, a premier tourist destination in Southern China has enjoyed double digit growth in the last 10 years. Chic residential tower block developments with exotic western names have sprouted up amongst the ancient limestone karst scenery, fuelled by cheap credit from China’s banks. We cycle into town on a drizzly mid-week May day along empty multi-lane highways. Cranes tower above nearly finished developments, with Starbucks and KFC advertising pathways to future obesity on the ground floor. But there is a eerie silence, exacerbated by the mist and spectacular scenery. The cranes are not working and many of the finished developments are empty….
Is this symptomatic of China heading for a sharp economic slowdown - a 'hard landing'? There is a clear cycling analogy. If you try and pedal too fast, the chances of taking a tumble rise and it can be painful. In the event of a crash, good treatment is necessary to ensure a full recovery! The chances of such a 'hard landing' for China's economy is certainly a question we’ve been putting to people we’ve met (when language hasn’t been a barrier). Fortunately Guilin, being a tourist destination, has plenty of English speakers. Li Jing, a local tourguide, is as clear as economists can be cryptic. ‘The recession, it is bad’, she starts before launching into a passionate tirade; ’ I buy a flat 6 months ago… before it (is) finished’ as she searches for the right english words. ‘Off-plan?’ I suggest. ‘Yes, they said it was a good deal’. But now the developers, they have no money. The water is working but the power is not yet complete’. ‘Hmm, not great when you’re living on the 40th floor’ I think. ‘Can you get compensation?’ I ask, trying to be sympathetic. ‘Well, we could go to court. We would win but the developer hasn’t got any money… the only winners would be lawyers’.
Meanwhile in Guilin and nearby Yangshuo, several hostel & hotel operators we spoke to talked of guest numbers being down around 50% compared to two years ago. As well as being on the international tourist circuit for China, the vast majority of visitors are Chinese. The booming middle class from the coastal cities have clearly been tightening their belts.
Certainly our anecdotal experience in Guilin and China as we pedalled towards Hong Kong though the urban sprawl of the Pearl River delta would support the narrative of China’s doomsayers, namely that of a corporate sector expanding too fast, fuelled by a (state sponsored) lending spree that is continuing despite the warning signs of non-performing loans.
But one of the lessons I used to stress to sceptical fund managers in my days as a city economist is that we need to look at the full statistics, especially in the bigger economies. Nearly 7% growth in the first quarter of 2016, following a similar number for 2015, according to the National Bureau of statistics. These are numbers that policymakers in the UK could only dream of and there is certainly little official talk from Beijing of a hard landing in China. But can we trust the statistics?
This is one of the questions I put to a leading private sector economist, who has covered China for more than 2 decades, on arrival in Hong Kong:
‘Certainly there have been discrepancies between regional and national data and we need to be cautious in interpreting the official figures. 2015 was revised down, but only by 0.1% (to an annual rate of 6.9%)’, he smiled knowingly as we met in one of Hong Kong’s gleaming skyscrapers. China has a history of smoothing its growth figures1 and Li Keqiang, now the premier, once said that local GDP data were "man-made and therefore unreliable".2
More interesting was his view on the chances of a hard landing, where he was ‘cautiously optimistic’, citing China’s ability and political will in recent years push through necessary structural reforms, citing examples from Deng Xiaoping post Tiananmen Square (albeit 3 years later), and in the wake of the Asia’s financial crisis in 1997-98. The parallels with the latter are more directly relevant where significant privatisation of State Owned Enterprises (SOEs) occurred in the late 1990s. This is a much needed solution today and he believes that this can happen, with the government still keeping 40-50% ownership whilst the greater private sector involvement would improve governance and efficiency. Moreover, he cited that whilst corporate and local government debt is very high, central government and household debt is relatively low. Interestingly, his views were echoed a couple of days later by the Petersen Institute’s Nicholas Lardy in the Financial Times.3
If they are right, the world economy would certainly blow a collective sigh of relief and recent jitters in the stock and commodity market would prove unfounded. Nonetheless, there are plenty of other medium term risks and issues for China and the global economy, not least how the two continue to be linked. Our trip, loosely following new and ancient ‘silk roads’ has tried to address this issue which, coincidently has become China’s signature foreign policy issue. Whilst ‘One belt, One Road’, doesn’t have the same exotic ring to it as the silk road, its effect may be as profound. Look out for our next blog on this as we finish our trip in China’s commerical capital of Shanghai.
1 ’The Art of Chinese massage, The Economist, 21st May 2009: http://www.economist.com/node/13692907
2 China's GDP is "man-made," unreliable: top leader, Reuters, 6th December 2010.
3 ’No Need to Panic, China’s banks are in pretty good shape’ FT, Thurs 2nd June, 2016 http://app.ft.com/cms/s/5bfb049a-2287-11e6-9d4d-c11776a5124d.html?ftcamp=crm/email//nbe/FirstFTEurope/product