Along with the impact of Britain’s recent vote to pull out of the European Union, the continuing slowdown in China’s economy remains a major source of concern for global growth and clouds prospects for the Japanese economy. As host of the Group of 20 meeting of finance ministers and central bankers in Chengdu over this weekend, where international responses to decelerating growth of economies worldwide will be among the key agenda, the Chinese government needs to do more to put its own economic act together.
China said last week that its gross domestic product for the April-June period rose 6.7 percent in real terms from a year ago — the same rate of growth as in the January-March quarter, when the pace was the slowest since the 6.2 percent growth in the first quarter of 2009 — right after the Lehman shock in the previous fall. On the face of it, China’s growth falls within the government’s 2016 target of a 6.5 to 7 percent increase. But the fact that GDP growth remained at that level despite the increased fiscal spending such as infrastructure investments to prop up demand seems to point to the continuing fragility of growth in the world’s second-largest economy.
And as is always the case, the credibility of these official figures is in doubt. Fluctuations in GDP growth across quarters generally fall within a zero to 0.2 percentage point range. It is now widely believed that the GDP data is being manipulated by Chinese authorities to keep the rate within the official target — and that China’s growth is indeed much slower than the statistics suggest. The latest figures do not warrant any optimism about China’s economic prospects.
There are worrying indications that the Chinese economy is either on the verge of falling or has already fallen into deflation. The 1.9 percent rise in consumer price index in June is well below the government’s target of 3.0 percent this year. The wholesale price index for industrial goods fell 2.6 percent for the 52th consecutive monthly decline.
The larger problem is that efforts to fix the economy’s structural woes — including the excess capacity in manufacturing sectors such as steel, and the heavy debts incurred by local governments and state-owned enterprises — are making slow progress. The government calls cuts to excess manufacturing capacity a priority in supply-side reform, but not much progress has been made. There also is the danger that carrying out hasty supply-side reforms while the economy is slowing and inflation is low could make matters worse — as has been the case in Japan’s protracted economic doldrums that began in the 1990s. Cuts to excess capacity need be accompanied by monetary and fiscal measures to stimulate sufficient demand.
The International Monetary Fund estimates that the debtloads of Chinese businesses have reached 145 percent of China’s GDP, and warns that the problem could develop into a financial system crisis in the future. There have been examples of heavily-indebted state-owned companies losing profits due to the economic slowdown and falling into default.
While the government reportedly will promote reorganization of the inefficient state-owned firms, the planned shift to a private sector-driven economic structure is not moving fast enough. Fixed asset investments for the first half of 2016, including capital investments by businesses, rose 9.0 percent — slowing from 10.7 percent growth in the January-March period. But while investments by the state-owned enterprises, which are in charge of the government’s infrastructure investments, expanded 23.5 percent, private-sector investments rose a sluggish 2.8 percent — a sharp slowdown from 10.1 percent growth in 2015.
These data illustrate the economy’s continuing dependence on public-sector spending. Officials admit that financial institutions still tend to lend more to state-owned firms with ties to the central government but remain cautious about lending to private-sector businesses out of concern over their default risk in the slowing economy. Structural reforms to allow the private sectors to drive the economy hold the key to long-term growth.
The impact of the Brexit vote in late June is believed to figure little in the GDP data. Given that China and the European Union are major trading partners to each other, any damage to the EU economy caused by Britain’s pending withdrawal could hurt China. Global financial market jitters over the Brexit vote appear to have largely subsided nearly one month on. Still, the IMF warns that global growth could decelerate to 2.8 percent this year and in 2017 — for the first time since 2009 — if negotiations over Britain’s exit get entangled and rekindle the markets’ concerns, possibly dampening consumer spending and business investments.
China’s slowdown and Brexit’s impact on Europe could bring both economies down, possibly triggering a vicious cycle that weighs heavily on worldwide growth, which would, of course, further dampen Japan’s fragile and uneven growth.
As the host of the G-20, Beijing needs to lead the discussions for international efforts to avert further slowdown in the world economy. The efforts should include China’s own measures to speed up the structural reforms of its economy and remove one of the main sources of global economic uncertainty.
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