Tuesday, December 20, 2011

Stimulus Drives Uneven Chinese Recovery

By Tianlun Jian

The global economic crisis that started over a year ago has come to a turning point, thanks to the joint efforts of many countries employing various stimulus packages. The world economy is recovering, even though the recovery will be slow and has a long way to go.

There are still many unstable factors, but the worst time is over. The performance of China’s economy will have significant impact on the global recovery as China is now the third-largest economy, the fastest growing economy, and accounts for a large portion of international imbalances. In this article, we will look at what China’s stimulus package and its macro policies have done to its economy.


Stimulus Package Drives Up GDP

According to recent statistics released by Beijing, China’s GDP is likely to grow about 8 percent this year. Why? Even until just three months ago, few economists thought this would be possible.
China’s GDP growth rates declined from around 13 percent in 2007 to merely 6.1 percent in the first quarter of 2009. Exports, the driving force of China’s growth, have declined for more than 20 percent for almost a year.

Apparently the growth rate picked up in the third quarter. China’s stimulus package of $586 billion in the last year is estimated to have pushed the economy through investment to grow by about 2 percentage points in 2009, more than it otherwise would have grown.

Statistics show that China’s economy picked up in just the last two to three months. However, the economy as a whole is still unstable. Obviously such growth costs a lot. Namely, China spent 4 trillion yuan in capital investment last year. China’s money supply had a huge jump—up 30 percent year-over-year in the first half of this year.

Moreover, new bank loans of 7,370 billion yuan (US$1,079 billion) were issued in the first half of the year, an increase of nearly 200 percent over the same period last year. All these measures have been used to prop up the growth rates.


Stimulus Props Up Stock and Housing Markets

The effects of such a huge investment and new loans can be seen through China’s stock and housing markets. Let’s look at two figures about the trends in China’s housing and stock markets.

From the graphs, one can easily see that there seems to be a direct link between the capital investment of 4 trillion yuan as well as the large amount of new loans and the time sequence of the soaring Chinese stock and property markets. Figure 1 shows that the Chinese stock market (represented by the Shanghai Composite Stock Index) had been falling from October 2007 to reach the bottom at around the end of last year and early this year. Then it rose sharply afterward.

 (Source: China National Bureau of Statistics)
(Source: China National Bureau of Statistics)

Similarly, China’s property market had also been falling all the way down, reaching the bottom around the spring of this year (Figure 2). Then it began rising strongly upward. Housing prices rose significantly between July and October, when the house prices jumped upward by 10 percent in many cities. That is to say, both the stock market and the property market have increased significantly this year.

The timing of these huge movements in both the stock and housing markets indicates that a large amount of money from the stimulus package has gone into the stock and housing markets. As is well-known, Beijing invested 4 trillion yuan at the end of last year, and new loans were also provided between the end of last year to the beginning of this year. New loans in the first half of this year increased by nearly 200 percent from the same period last year, and the money supply grew by nearly 30 percent.

However, isn’t it strange that while China’s stock and property markets continue to rise, China’s overall price index has been falling? This can be explained in two ways. First, China’s economy is very weak, and the stimulus money has not gone into the economy.

Second, much of the money actually has gone into the stock and property markets. Earlier this year, a China finance officer estimated that more than 20 percent of the money went into the stock and property markets.


Weak Exports and Domestic Consumption

How is the current Chinese economic situation? Let’s look at some other indicators. Both the consumer price index (CPI) and the wholesale price index (WPI) have been declining, and the prices of almost all sectors have been declining. The deflationary environment indicates that the Chinese economic situation is still rather weak, even though the third quarter GDP reportedly grew 8.9 percent from a year ago.

Now, let us take a look at another economic indicator—exports, the driving force of China’s economic growth. China’s exports have declined by a magnitude of around 20 percent since the second half of 2008. Even in October (the latest data available), exports decreased by 13.8 percent from a year ago.

This situation is certainly associated with the weak external demand due to the global recession. The global economy has slightly improved since the summer, and it will likely improve further. However, I expect that China’s exports will continue to decline till the year-end or early next year, before picking up again.

Beijing’s current policies and its stimulus package have not been targeted toward problems in China’s economic structure and income-inequality issues. Instead, its policies will only further widen the income gap. Income inequality and wealth inequality among the Chinese people have resulted in bad and abnormal economic situations.

This uneven distribution of wealth is also closely related to China’s stock and property markets, which have been pushed higher year after year. The price rise in the property market is especially associated with the macro policies, including real estate policy, land policy, currency undervaluation, and so on. Investment has also been guided by such policies.

China’s consumption as a percent of its GDP has decreased year after year, from about 58 percent in the 1970s to around 35 percent in 2008. Declining share of consumption in GDP is the fundamental cause for insufficiency in domestic demand. This is an urgent problem for China now.


Abnormal Property Market

There is an abnormal phenomenon in China’s property market: Housing prices have continued climbing for years, but the rental prices remain relatively low. In Beijing, the average price for new, unfinished apartments—apartments that need to be painted and to have sinks, bathrooms, a kitchen, and the like installed—is 18,000 yuan per square meter ($245 per square foot). This price is very high relative to the average income and also high relative to apartment rental fees.

In general, the reasonable ratio of a house price over the monthly rent is about 200 in Western countries. A higher ratio means the house price is too high relative to rent. However, such a ratio in Beijing has reached above 300. Usually this implies a bubble in the property market.

At present, the low rental cost reflects an over-supply of houses and a weak demand in China’s property market. It also implies that people who cannot afford a house have to rent, as the rental fees are affordable. Furthermore, those who can afford a house will buy a second and third house, which pushes up the house prices.

There are many Chinese people who buy houses as an investment in the hope of making money through the appreciation of the cost of the house rather than rental income. China’s macro policies have actually played a misleading role in this aspect.

In summary, China’s stimulus packages can boost its GDP in the short run through capital investment, infrastructure construction, and so on. However, for the sake of long-term and steady growth in China, the most important thing is to change macro policies and adjust the economic structure, and in particular, to increase domestic consumption—the consumption share of GDP. This will enable the continuous increase of China’s domestic demand and lay a good foundation for stable economic development.

Tianlun Jian holds a doctorate in economics and writes regularly on the Chinese economy.

This  article was first published on The Epoch Times on Dec. 2, 2009.