By Michael Lelyveld
Despite a disappointing performance last month, China has cast its economy in a favorable light as it prepares for its crucial political meeting in the fall.
The pace of China’s economic growth “showed visible signs of fading in July,” as a range of indicators from industrial production to investment all fell short of forecasts, Reuters reported.
Growth of industrial output slowed to 6.4 percent from a year earlier compared with 7.6 percent in June, while fixed-asset investment rose 8.3 percent in the first seven months, down from first-half growth of 8.6 percent, the National Bureau of Statistics (NBS) said.
Other indicators like retail sales also dimmed, as year-on-year growth slipped to 10.4 percent in July from 11 percent a month before.
Foreign direct investment in China fell 1.2 percent in the seven-month period, the Ministry of Commerce said.
The lusterless data followed less than a week after the General Administration of Customs reported a slowdown in July trade results with exports rising 7.2 percent in dollar terms, dipping from 11.3 percent in June.
The weaker numbers, while far from dismal, did not tell the encouraging story that China’s leaders wanted to hear before the Communist Party’s critical 19th National Congress, likely to take place in the next two months.
So, state media put out more positive versions.
The July figures were a sign of “slower but steadier growth” with a “better structure,” the official Xinhua news agency said.
In an unusual preview, Xinhua said a day before the NBS release that the numbers were “widely expected to be relatively high, despite milder growth in July, as the economy continues to show resilience.”
The commentary ran under a more bullish headline, reading, “Rapid growth expected for major indicators as China’s economy stabilizes.”
The official spin is understandable in light of the stakes for the party congress, which is expected to confirm a second five-year term for President Xi Jinping as general secretary and name new officials to the Politburo and powerful Standing Committee posts.
China’s official press has been paving the way with positive interpretations for weeks, presenting the government’s pro-growth policies as the white knight that came to the world’s economic rescue after the global downturn in 2008.
In another commentary posted a day before the July numbers, Xinhua said the world economy was now “recovering sluggishly” and the West was “mired in an unprecedented institutional crisis.”
Meanwhile, “China constantly creates social and economic miracles, showcasing its growth path based on socialism with Chinese characteristics.”
Xinhua’s pre-congress praise has extended beyond economic image-building to include the government’s response to the recent Sichuan earthquake.
“Quake rescue demonstrates China’s strength,” a Xinhua headline on Aug. 10 read.
Although it may be less than miraculous, one of China’s successes has been in pumping up its gross domestic product growth to 6.9 percent in the first half of the year, giving leaders a better story to tell when the national congress convenes.
Some self-congratulation deserved
Scott Kennedy, deputy director of China studies at the Center for Strategic and International Studies in Washington, said that some self-congratulation is deserved after an apparent slump in 2015.
“Outside observers expected that in 2017 China’s leadership would focus heavily on maintaining growth and avoiding any instabilities in the economy,” Kennedy said by email.
“In reality, growth has been more buoyant than predicted by anyone, and so the leadership has turned its attention more forcefully than expected to limiting risks in the financial system,” he said.
Early signs suggest some progress in slowing debt growth and addressing the risks, said Kennedy.
“This does not mean the economy has fully restructured or that productivity growth has recovered,” he said. “Much more liberalization needs to occur for that, but I think coverage identifying modest improvements in their economic situation is justified,” he said.
The push to boost GDP growth above last year’s 6.7-percent rate may have given leaders a cushion against the political pressures of the congress. But spending and credit excesses may not come without consequences.
Smoothing the way for the congress with heavy budget outlays may have disrupted the government’s normal fiscal cycle, leaving it with less to spend for the rest of the year, according to Bloomberg News.
China ran a record first-half fiscal deficit of 918 billion yuan (U.S. $137 billion), equal to more than 2 percent of GDP, Bloomberg said.
Larry Hu, head of China economics at Macquarie Securities Ltd. in Hong Kong said that spending was “front-loaded … to ensure a stable economic backdrop” for the congress drama.
The result is that second-half budget spending could be 1 trillion yuan (U.S. $150 billion) lower than a year earlier, said economists at China International Capital Corp., according to Bloomberg.
Derek Scissors, an Asia economist and resident scholar at the American Enterprise Institute, said that fiscal spending is “not large enough to have economy-wide effects as compared to changes in state lending.”
Figures on first-half bank lending also suggest pre-congress economic support, despite publicized efforts to curb risks and debt.
New yuan-denominated loans rose 5.8 percent from a year earlier during the period to 7.97 trillion yuan (U.S. $1.19 trillion), while outstanding loans climbed 12.9 percent to 115 trillion yuan (U.S. $17.2 trillion), the People’s Bank of China said.
In July, outstanding new loans of 825.5 billion yuan (U.S. $123.5 billion) dropped 53 percent from 1.54 trillion yuan (U.S. $230.4 billion) in June, but they rose 78 percent year-on-year, according to PBOC reports.
“With regard to deleveraging, there hasn’t been any. The pace of leveraging has slowed, that’s it,” Scissors said.
‘A pleasant surprise’
Other state media reports have credited China’s economic growth for this year’s strengthening of the yuan against the dollar rather than citing the slower pace of planned interest rate hikes for the weakening of the U.S. currency.
“After the first-half GDP growth — 6.9 percent — sprang a pleasant surprise, the market’s confidence in the Chinese currency has been restored,” the official English-language China Daily said on Aug. 10.
The official press has also been singing the praises of efforts to revitalize the sluggish state-owned enterprise (SOE) sector through mergers and “mixed-ownership” plans to attract private capital. The government has promised a complete “restructuring” by the end of 2017.
“The reform is taking off in the second half of the year,” Xinhua said on July 24.
But analysts are doubtful that much will change.
“Reform of state-owned firms has taken the form of mega-mergers, which has reduced the number of firms without reducing the share of output coming from the state sector,” said senior fellow Caroline Freund in a paper for the Peterson Institute for International Economics.
“The strategy of creating super-sized state-owned firms is neither good for growth nor good for global business,” Freund said.
The rosy economic coverage may be persuasive for domestic audiences as party leaders count up the successes of their policies, but it may only serve to slow progress on the challenges that China faces in coming years.
“The more positive spin is very obvious and, of course, it fits in with the tighter control of information,” Scissors said.
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