Siah Hwee Ang says China’s plan is still on track but there are global events looming that could threaten to derail plans for the second half of the year

By Siah Hwee Ang* 

The latest growth figures show that China has been growing at 6.7% year on year in the second quarter this year.

This matches the growth rate in the first quarter of the year. The big question, however, is whether or not this rate can be maintained over a longer period of time.

We know that China’s economy has slowed down in the last few years and we can expect further decline in 2016 and 2017.

World economic slowdown aside, China is undertaking significant structural reforms around its economy that have led to the slower pace of economic development.

China’s supply-side structural reforms will go a long way to improving China’s future, but they do not contribute to its immediate growth.

Key points of focus for the Chinese government involve dealing with quality issues and excess capacity, the effect of the latter having recently been felt in New Zealand.

Keeping an eye on debt and savings

Growth in debt continues to be troublesome. China’s debt-to-GDP ratio of around 249% in 2015 was as high as that of the European Union and the United States.

Chinese banks have written off US$302 billion worth of bad loans in the past three years. The ratio of non-performing loans stood at 1.75%. This figure is expected to increase in the next few years.

The good news is that the savings rate is also high at around 50% of GDP over the last five years, and that external debt (the total public and private debt owed to non-residents) is only 16.2% of GDP.

Further, the massive increase in the debt-to-GDP ratio is due to borrowings from state-owned enterprises, which the Chinese government is actively consolidating.

A massive shift away from industrial sectors, and the reskilling and redeployment of workers are two key aspects of this consolidation.

There is a major push for more consumption. Chinese households have low leverage with a debt-to-deposit ratio of 48%, and household deposits constitute 40% of the US$22.5 trillion in total bank deposits.

This push, while on an upward trend, has been supplanted by uncertainties surrounding the world economy in the past few months, and in the months to come.

At the same time, China’s fixed asset investment, has slowed to its weakest pace in 16 years, rising by only 9.6% in the first five months of this year.

Part of the reason for this may be due to continually weak private investment. Private investment, while encouraged, has not been on the rise because of limited access to some industries in China and overcapacity issues in others.

Until such time as the economy is more open to private participation, policies surrounding state-owned enterprises will continue to dictate the progress of the Chinese economy.

There are many industries, for example in the healthcare and environmental spheres that clearly need both public and private investment.

The services sector steps it up a notch

Meanwhile, the services sector continues to rise as the main contributor to the Chinese economy. It expanded by 7.5% in the first half of this year, as compared to the same period last year.

The added value of this sector is now 54.1 per cent of GDP, 1.8 percentage points higher than the same period last year, and 14.7 percentage points higher than the manufacturing sector.

The acceleration of the services sector can be attributed to the higher demand for services, coupled with upgrading in some industries.

Overall, China’s plan is still on track. But there have been several major global incidents this year with a few already looming ahead that could threaten to derail China’s plan for the second half of the year.

And the Chinese Premier has indicated that China alone will not be able to stop the world economy from downturn induced from other major world incidents.

Regardless, we should no doubt lower our expectations of China now that both the International Monetary Fund and the World Bank have further cut their 2016 growth forecast for the world economy by 0.1 percentage points (from 3.2% to 3.1%) and 0.5 percentage points (from 2.9% to 2.4%) respectively.

*Professor Siah Hwee Ang holds the BNZ Chair in Business in Asia at Victoria University. He writes a regular column here focused on understanding the challenges and opportunities for New Zealand in our trade with Asia. You can contact him here.