Real per capita disposable income was 6. Beneath the slowdown lie changes in the patterns of consumption. Sharper drops in sales of individual companies, or even of sales in categories like autos or cosmetics, do not tell the whole story.
Monitoring and Navigating the Evolving US-China Conflict
Online sales, for instance, grew at a strong 24 percent. For the first time in China, we also see a new segment of customers trading down. The next few months will tell. The crisis kicked off a round of stimulus and financial liberalization measures that lasted for the next seven to eight years. This led to the rapid growth of shadow banking and informal lending and spawned a range of experiments in debt issuance. However, recently the efficacy of government stimulus has been waning. Each renminbi of economic stimulus that the government pumped into the economy delivered less in actual GDP growth than in the past.
The rise in ICOR, the Incremental Capital-Output Ratio—the amount of money the government needs to put in to yield a unit of growth—meant that economic stimulus was, in other words, getting more expensive. Years of priming the credit pump also created asset bubbles in the economy sustained through excess liquidity. Real estate prices have continued their upward climb even as nominal GDP growth has now settled into single-digit territory. Since , regulators have acknowledged these challenges and emphasized deleveraging.
This has led to a significant drop in credit availability over the past 24 months. Growth in outstanding credit fell from 13 percent in to 7 percent in , below nominal GDP growth of 9. This reflects a marked contraction in shadow banking financing that grew by 13 percent in , but declined by 7 percent in Exhibit 2. Exhibit 2. It takes a lot to slow the Chinese economy, but the impact of the credit squeeze has started to be felt, particularly among smaller enterprises in the private sector, and among companies in tier three and four cities.
And, since the Chinese economy is increasingly dependent on consumption and services, a squeeze on companies ultimately ripples through to incomes, consumption, and overall growth. A lot of recent news reports have led many to believe that the trade spat between the US and China is leading to the current economic slowdown; politicians have also used this as a convenient explanation.
The effect may be more indirect, impacting consumer confidence and causing private sector companies to hold off on making decisions to invest in more manufacturing capacity. Regulators are now figuring out ways to re-open the credit spigots, but they are moving more cautiously, and are applying levers in a more targeted way than they did during the eight years of credit expansion.
This is intended to allow banks to issue bonds and recapitalize, and lend more, but under the condition that the target of lending achieves certain minimum credit standards. Ultimately, China will have to chart a course between providing more stimulus with the resulting bubbles and externalities , pushing through structural reforms of the state-owned sector which may be politically sensitive , or accepting slower overall growth rates.
These policy choices may be influenced as much by political and geopolitical factors as economic considerations. The next few months will be indicative of which course we are on, as well as whether we are in a longer or shorter period of economic slowdown. With the intense credit pressure being applied particularly to mid-sized private sector companies, we expect there could be a considerable round of consolidation on the horizon. In the prior periods of credit tightening, industry consolidation favored the state-owned enterprises over their less-well-funded private competitors.
Today a deeper capital market and the massive growth of private capital in China might change this dynamic somewhat. This, combined with a potentially increased openness to foreign direct investment across several sectors being discussed in broader trade-related negotiations, could create a window of opportunity for multinationals, with scale and significance in China, and the willingness to make bold moves, to acquire domestic competitors caught in the credit squeeze.
Some experts figure Beijing might risk further driving down the renminbi against the dollar.
China Brief: The state of the economy
Sign up for free access to 1 article per month and weekly email updates from expert policy analysts. Create a Foreign Policy account to access 1 article per month and free newsletters developed by policy experts. Thank you for being an FP Basic subscriber. To get access to this special FP Premium benefit, upgrade your subscription by clicking the button below. Thank you for being an FP reader. To get access to this special FP Premium benefit, subscribe by clicking the button below. Beijing is preparing another massive stimulus, but the economy is visibly running out of steam.
A vendor waits for customers at a Beijing market on Jan.
Journal of Chinese Economic and Business Studies
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