China GDP grows at 6.7 percent amid growing concerns about structural problems

By Pietro Mattamira

 

Last Wednesday the Chinese government released GDP figures for the third quarter. The Chinese economy grew at a 6.7 percent rate year-over-year, in line with expectations, and is on track to reach the government’s goal of 6.5 percent growth for the year, the lowest in 25 years. The official manufacturing purchasing manager index came in at 50.4, thus remaining above 50, which separates expansion from contraction.

While economic growth has stabilized after the few volatile quarters, the figure was helped by the significant monetary and economic stimulus implemented by the government and by easy access to credit. Government spending during the quarter grew at an 11.3 percent rate, outstripping revenue growth of 4.9 percent. Deficit spending relative to GDP was 2.7 percent during the first nine months of 2016, although, if a broader definition of fiscal spending is employed, that figure can rise to as high as 6 percent. The loose monetary policy has caused the yuan to continue its depreciation against the dollar and has promoted easy access to credit.

The economy was also buoyed by the strong growth in consumer spending, which, propelled by easy access to credit, accounted for 71% of GDP growth. This fact, coupled with the shrinking current account surplus and decreased focus on industrial production indicate that the Chinese economy is undergoing a transition from export-led growth, to the increased reliance on consumer spending distinctive of developed economies.

 

While the government has adopted a highly expansionary policy to sustain growth, most analysts point out that it has failed to address the growing structural problems that weigh upon the Chinese economy and that, if not properly addressed in the near future, could become systemic. The most significant of the structural problems that China currently faces is its red-hot housing market. In the first nine months of the year, house sales grew by 43.2 percentage points, adding to the fear of an housing-market bubble. Another serious issue is the high level of private and corporate debts, the latter having reached 145 percent of GDP during the quarter. The swelling public debt, whose increase was fuelled by a fiscal deficit that more than doubled in the first three quarters of 2016 from 625.1 billion yuan to 1.46 trillion, added to the growing debt burden. Industrial overcapacity, especially in the steel and coal sectors has  also remained substantial in the quarter.

 

Economists expect GDP growth to remain stable in the current quarter, but to start edging down in 2017, as the effects of the stimulus begin to wane. The current estimate for next year growth is 6.2 percent, according to the IMF.

 

Sources:

http://www.wsj.com/articles/china-growth-holds-steady-at-6-7-in-third-quarter-1476843715

http://www.wsj.com/articles/state-spending-keeps-chinas-industrial-sector-humming-in-september-1475297700

http://www.nytimes.com/reuters/2016/10/18/business/18reuters-china-economy-gdp.html

http://www.nytimes.com/reuters/2016/10/20/business/20reuters-china-economy-gdp.html

https://www.ft.com/content/1a338326-94e6-11e6-a1dc-bdf38d484582

 

 

Filed in: Economy

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