By Michael Lelyveld
“Stability” has become the official watchword for China’s economy, but the government has yet to define what it means.
The government says it achieved stability in the economy in 2016 and will maintain it this year, despite bouts of currency depreciation and forecasts of slower economic growth.
Stability and stabilization have become mantras for policy makers, recited repeatedly in the official press.
“In a world economy beset with increasing instabilities and sluggish recovery, China has stuck to its new development concept and the basic tone of making progress while maintaining stability,” President Xi Jinping was quoted as saying after a Communist Party of China (CPC) Central Committee meeting on Dec. 9.
“China … made stability as the basic tone for next year’s economic planning,” the official Xinhua news agency reported, summing up the government’s annual Economic Work Conference chaired by Premier Li Keqiang on Dec. 16.
“As the Chinese economy maintains medium-high growth, the [yuan] renminbi has the conditions to remain relatively stable,” the National Bureau of Statistics (NBS) said on Dec. 13, according to Xinhua.
But the government has offered few if any specifics about how it will measure stability or determine when stabilization has been achieved.
The meaning of stability
Does stability mean that gross domestic product growth rates will stay constant, stop falling, decline only slightly or perhaps resume higher levels?
Does it mean that the yuan renminbi (RMB) will halt its decline against the U.S. dollar, or only drop less than it did last year?
Will China try to slow last year’s surge of capital outflows, or simply keep them from increasing?
So far, nobody knows.
One major problem in assessing what the government means by stabilization is that it has rarely if ever reported that the economy was anything other than stable.
“None of these terms that make sense in other countries make any sense in China because they don’t ever officially acknowledge the need for stabilization,” said Derek Scissors, an Asia economist and resident scholar at the American Enterprise Institute in Washington.
Last week in a year-end summary, Xinhua came close to conceding that the government faced serious economic trouble last year.
“China’s capital market fluctuations at the start of 2016 signaled it was going to be a tough year,” Xinhua said.
“However, despite the rocky start, the economy is ending the year on a firm footing, and this year’s growth target will be met,” it said.
China’s claims that it achieved economic stability last year are backed by official GDP figures showing consistent 6.7-percent growth in all of the first three quarters.
While the rate was down from the 2015 pace of 6.9 percent, it landed within the government’s target range of 6.5 to 7 percent.
Most economists view the official GDP figures as exaggerations, useful only to indicate relative rates of growth.
Scissors estimates that actual GDP quarterly growth rates since mid-2015 may have fallen as low as three percent and have now risen to the “upper fours.”
A forecast by the international bank Standard Chartered estimated a mild speedup in the fourth quarter with stronger service sector performance, giving the economy a growth rate of 6.8 percent for 2016, the official English-language China Daily reported.
If that is the case, it would suggest a recovery from the growth slowdown, although the government has been careful to avoid using the word.
Any claim of recovery would raise the question: “Recover from what?”
Instead, the government has settled on “stability” and “stabilization” as preferred terms for China’s economic condition, but even these may spur misgivings.
“This is an admission on their part that there was a period of weakness and they think they’ve now fought it off,” said Scissors. “That may actually be true.”
Staging a recovery
As China begins a new year, some of the official data suggest that the government has staged a recovery in 2016 after returning to the once-scorned formula of massive stimulus spending, infrastructure projects and excessive bank loans.
In November, yuan-denominated lending jumped 22 percent from a month earlier to 794.6 billion yuan (U.S. $114.4 billion), the People’s Bank of China (PBOC) reported.
Surrogate indicators like power consumption have shown signs of recovery with five-percent growth through 11 months after rising only 0.5 percent in all of 2015.
While heavy industry and trade have slumped from the heady days of the past decade, officials have taken heart from retail sales, which rose 10.8 percent from a year earlier in November, while industrial output showed a moderate gain of 6.2 percent.
Even that much industrial growth may have a dark side, since it includes sudden spurts from the high-polluting and overcapacity coal and steel industries, which the government had pledged to get under control.
Last week, the State Council punished two deputy governors in eastern Jiangsu and northern Hebei provinces for allowing previously closed steel mills to reopen, state media reported.
The unauthorized production has been blamed for last month’s red-alert smog in Beijing and more than 20 other cities.
Reviews of the past year are likely to find an uneven pattern of government interventions and asset bubbles, like those in real estate, coal and steel, rather than the steady application of economic policies that stabilization implies.
The government seems to have succeeded in cooling the speculative growth of housing prices late last year, but only after urging cities to restore controls on second and third home buying that were lifted in 2015.
Given the reactions to the bubbles in property, coal and steel, the government cannot rely on those sectors for growth in 2017.
As excess liquidity seeks outlets and investment opportunities abroad, the government may have set the stage for capital flight.
Final figures for 2016 are likely to show a growing imbalance of outbound over inbound investment as capital flows toward the stronger currency and rising interest rates of the United States.
In the first 11 months of last year, China’s non-financial outbound direct investment (ODI) soared 55.3 percent to 1.07 trillion yuan (U.S. $154 billion). That compares with foreign direct investment (FDI) of 731.8 billion yuan (U.S. $105.3 billion), up only 3.9 percent from a year earlier.
In response, the government has ordered banks to tighten foreign exchange policies in what amounts to creeping capital controls.
The yuan began 2016 at about 6.5 to the U.S. dollar and ended the year at 6.945 to the dollar, depreciating by 6.5 percent.
In November, China’s foreign exchange reserves fell to $3.05 trillion (21.2 trillion yuan) in the fifth monthly decline in a row.
If the trends continue into 2017, China could come close to the minimum level of U.S. $2.8 trillion (19.4 trillion yuan) it is estimated to need for covering its imports, servicing debt and keeping confidence in the yuan.
Given the challenges, a loosely-defined stability may be as much as the government can safely promise.
The government is not expected to announce specific targets for GDP growth in 2017 until its annual legislative meetings in March. But an official rate of 6.5 percent would allow it to argue that the “new normal” of sustainable growth is continuing while the numbers are coming down at a stable pace.
A forecast by the Chinese Academy of Social Sciences (CASS) predicts 6.5 percent growth for the first two quarters, slipping slightly to 6.4 percent in the second half.
“The gap between reality and official data is narrowing, and that is a sign of stabilization,” Scissors said.