China's Growth Story Has Plenty of Holes

Don’t get carried away by the green shoots. Ample data show that Beijing’s targets are increasingly unrealistic.

By Christopher Balding

As China posts yet another quarter of six percent-plus growth, analysts have been quick to brand the latest upswing as a rebound. 

Buoyed by this year’s double-digit stock-market gains, large flows of credit and tax cuts for consumers, Beijing is trying to sell the narrative that growth remains stable.
Some official statistics seem to support that theory: Gross domestic product grew an annualized 6.4 in the first quarter from a year earlier. 

Retail sales rose 8.7 percent and factory output climbed 8.5 percent.
Dig beneath the headline data, though, and we get another story.
Beijing has been flooding the market with credit, with total social financing up 40 percent so far this year. 

Notably, the source of funds is expanding beyond banks, indicating an uptick in shadow activity. 

Yet fixed-asset investment is up only 6 percent from last year. 

That means loans aren’t heading into areas that will boost the real economy. 

Meanwhile, companies aren’t getting paid what they’re owed, and account receivables are building up.
The consumer side doesn’t look any better. 

Auto sales fell 11 percent in the first quarter from an already tepid 2018. 

Mobile-phone shipments slid 12 percent over the same period, compounding a 26 percent tumble a year earlier. 

Households are clearly feeling the pinch: They’re ordering less takeout from delivery apps and seeing fewer movies at the box office. 

Shoppers are using their credit cards more, with balances up 23 percent in the fourth quarter from a year earlier. 

And while surveys show household expenditure rose nearly 15 percent in 2018, there’s little left over in the budget for any extras. 

That helps explain why production of air conditioners is down 1 percent in the first two months of the year, while washing machine output dipped 7 percent.
Beijing has unveiled a standard buffet of fiscal stimulus, credit growth, debt restructuring and consumer-focused tax breaks to boost growth. 

It’s debatable whether any of that will work. 

Public finance doesn’t play out in a vacuum: A tax-cut recipient has the option of saving that money or spending it. 

Given high Chinese household debt levels, it’s quite likely that windfall will have a much smaller impact on consumption than hoped. 

The same thinking applies to firms and local governments.
The more pressing question might be how much new credit is flowing into financial markets given the rise in stocks and commodities prices. 

A long history of credit binges is a reminder that Beijing could end up spending a lot of money to accomplish very little.
With total inflation running at around 1 percent, compared with 2.9 percent at the end of 2018, the drop-off in nominal growth is going to push economy-wide leverage significantly higher in 2019. While Beijing has abandoned specific growth targets, it still aims for a range – and even that may not be feasible. 

Trying to maintain six percent-plus real growth in an economy already saddled with debt and excess capacity, one that can no longer depend on current account surpluses of 2 percent to 3 percent, is simply unrealistic. 

More than anything, Beijing may need to reset its own expectations.