China Falls Back On Old Economic Growth Formulas – Analysis

By Michael Lelyveld

China’s economy has exceeded expectations so far this year by outperforming in sectors that the government has promised to control.

Official statements were nearly ecstatic as the National Bureau of Statistics (NBS) announced last month that first-quarter gross domestic product rose 6.9 percent from a year earlier, topping the government’s 2017 growth target of “about 6.5 percent.”

The apparent rebound came after the economic growth rate of 6.7 percent in 2016 slipped to the lowest level in 26 years, leading the government to adjust its 2017 goal down another notch.

The NBS traced the surprising first-quarter turnaround to the “leadership of the Central Committee of the Communist Party of China with General Secretary Xi Jinping as the core.”

The agency asserted that “people from all regions and departments” had implemented party policies, “getting (the economy) off to a good start.”

Industrial production jumped 6.8 percent in the quarter and 7.6 percent in March alone, surpassing the 6-percent rate set in 2016. The March output was the fastest since December 2014, Reuters said.

Retail sales climbed 10 percent in the quarterly period and 10.9 percent in March, showing a positive push after rising 10.4 percent last year.

Fixed-asset investment climbed 9.2 percent in the quarter, racing past the 2016 gain of 7.9 percent.

Nearly all the figures improved on consensus forecasts, Bloomberg News reported.

“Once again, the naysayers were proved wrong by China’s better-than-expected economic growth in the first quarter,” the official Xinhua news agency said in a commentary.

“For the first time in the recent years, China starts a year with a strong headline GDP,” said Raymond Yeung, an economist at Australia & New Zealand Banking Group in Hong Kong, as quoted by Bloomberg. “Thanks to strong investment and property, the economy is performing well.”

Yet, the good economic news came with less positive implications, since much of the forecast-beating performance appeared to be due to growth that the government has said it is trying to slow.

Steel production was a case in point, hitting a monthly record of 72 million metric tons in March with a 1.8-percent increase from a year before. Quarterly output of 201.1 million tons rose 4.6 percent, Reuters said.

The new high was a boost for GDP but a sore point for residents of northern cities who have been smothered by smog from coal-fired steel plants.

Curbs on steel industry

The government has been trying to impose curbs on the steel industry for over a year, in part due to anti-dumping pressures abroad. In 2016, China produced 50.4 percent of the world’s crude steel, according to World Steel Association data.

On April 20, U.S. President Donald Trump signed an executive memorandum to expedite an investigation into whether steel imports pose a threat to U.S. national security.

Beijing argues that China’s steel industry met its targets by eliminating 65 million tons of excess production capacity last year, but a study by Greenpeace East Asia found that capacity actually rose as plants reopened to take advantage of price increases.

Whether steelmakers met the targets or not, the quarterly figures suggest that China still has more than enough capacity to boost output.

In response to the smog crisis, inspections by the Ministry of Environmental Protection (MEP) found numerous instances of steel mills operating illegally in March and April, producing without pollution control plans or refusing to submit to inspections at all.

Other major contributors to the GDP rise suggest similar conflicts with government policies.

Under President Xi, the government has said repeatedly that China would seek lower and more sustainable growth by relying on consumption and the service sector rather than investment, infrastructure and heavy industry.

But the first quarter results tell a different story.

Surrogate indicators of the economy in the power and rail sectors both point to an industrial surge.

Electricity consumption in the quarter rose 6.9 percent from a year earlier, compared with a 3.2-percent gain in the same period of 2016, the National Development and Reform Commission said. In the secondary or manufacturing sector, power use increased 7.6 percent after edging up only 0.2 percent a year before.

The recovery of rail tonnage was even more dramatic.

Quarterly cargoes soared 15.3 percent this year after plunging 9.4 percent in the period last year.

The numbers are evidence of the rebound for steel and other heavy industries, said Derek Scissors, an Asia economist and resident scholar at the American Enterprise Institute in Washington.

“The industrial production figure, the power figure, the rail freight figure—they all say that either growth was quite exaggerated last year at this time or the push is clearly coming from those areas,” Scissors said.

Property development boom

Real estate development also appeared to defy the government’s announced efforts to discourage speculation in housing and property.

First-quarter real estate investment rose 9.1 percent compared with 6.9 percent a year earlier. Sales of residential buildings increased 20.2 percent while commercial building sales were up 25.2 percent, the NBS said.

Despite official pressure on the property sector, added investment has been helping to drive the boom in construction materials including steel.

On the one hand, the government has publicized a wave of restrictions on housing sales to cool the market, but on the other, it increased the residential land supply in first-tier cities by over 50 percent in the first quarter, Xinhua said.

And although the government has made a point of rejecting calls for stimulus spending over the past three years, investment in infrastructure posted a quarterly gain of 23.5 percent.

The results raise the question of whether the government has simply been paying lip service to its own reform policies or whether GDP growth has risen thanks to forces beyond its control.

Scissors said the first explanation is more likely, arguing that the government reacted to a serious drop in growth during 2015 by going back to the strategy of pumping up the economy with stimulus spending that revived industry.

“I think 2015 was a very weak year. GDP growth was probably half of what they said, and that was not acceptable,” said Scissors. “And so, they went back to the old playbook, … more steel, more building materials, all of that stuff.”

Speaking at a symposium in Beijing on April 18, one day after the quarterly figures were announced, Premier Li Keqiang seemed to acknowledge as much, calling for “accelerating the shift from traditional economic growth engines to new ones.”

Rather than claiming success from the first-quarter numbers, Li said that “China must speed up replacing old growth drivers with new ones,” Xinhua reported.

“The focus should be on new technology, new industries and new business models, supported by the development of new production factors including knowledge, information and data,” Li said.

Industrial formula fallback

Officials have been repeating similar development mantras for years, but when the economy suffers, the government has fallen back on industrial formulas to restore higher growth.

The International Monetary Fund raised its 2016 GDP forecast for China slightly from 6.5 percent to 6.6 percent at its April meeting. But most analysts expect declining quarterly growth rates for the rest of the year, now that the excess of the first quarter has eased pressure on the government’s 6.5-percent goal.

“It’s been successful for what they want to do, but it’s going to cause them problems soon,” said Scissors, speaking of the heavy industry boost.

“The economy is definitely moving faster. Whether it’s healthier is a different question, but it’s definitely moving faster than it was in 2015,” he said.

Early results for April suggest that the government is already deescalating its pro-growth policies after overshooting its GDP goal.

Over the weekend, the NBS released weaker growth numbers for its monthly Purchasing Managers’ Index (PMI) as the reading for manufacturing slipped to 51.2 from 51.8 percent in March.

Any mark above 50 is indicative of expansion, but Xinhua said that “the pace has slowed as authorities stepped up efforts to contain financial risks.”

Non-manufacturing activity followed a similar track. The PMI rating for April dropped to 54 from 55.1 in March, the NBS said.