China is struggling to cope with a slowing economy, and that spells bad news for the rest of the world, John Hewson writes.
A few years ago, I was in China in the middle of September when the Chinese authorities announced the GDP growth rate for the September quarter.
That is, even before the quarter itself was finished! That’s something Australia’s statistical authorities are usually not able to do until about the end of the first week in December.
Moreover, the quarter-to-quarter movements in China’s announced GDP growth are much, much “smoother” than is ever the case in any other advanced economy.
Although China has embraced many of the elements of a capitalist, market-based economy, it is still very much a communist, centrally planned and controlled economy. Growth “targets” mostly become “outcomes”, more or less.
The Western media, and most commentators, tend to ignore the significance of this still fundamental difference, writing and commentating on China through Western eyes, against Western benchmarks, as if China is a western developed economy.
Clearly the data are “massaged”. Even the Chinese Premier, Li Keqiang, has admitted that the data are “man made”.
So, the challenge is what to read from what is published, which is a very important question for a country such as Australia that is so dependent on what actually happens in China.
The data released last week, suggesting a GDP growth rate of 6.9 per cent for 2015, was the lowest annual rate in 25 years, revealing the lowest quarterly rate for a century. So even the massaged number is concerning, behind which are significant falls in steel, cement and glass production, and the smallest increase in electricity generation since 1974, plus flat real estate investment, and so on.
However, in my view, the actual growth rate is closer to 5 per cent, or even less. On top of that there are significant structural problems, virtually right across the whole economy – mounting debt, bubbles in stock and property markets, enormous and mounting inequality, corruption, and massive pollution.
The Chinese Government and authorities are obviously struggling to manage this growth slowdown, and fear the resurgence of significant social pressures if they fail. The growth slowdown exposes these structural weaknesses. It used to be feared that the social consequences could become very real if the growth rate were to fall much below 6 per cent. This probably is a major reason for massaging the growth numbers.
In broad terms, the Chinese economy is attempting to make a very significant transition from one based on investment, construction and manufacturing, to one based more on services, and driven by consumption expenditure.
Much of the comment on the growth numbers released this week seemed to take great heart from the fact that the services sector now accounts for just over half of the economy, and is now a much more significant contributor to growth than (say) manufacturing, as the Chinese have now almost lost their cost advantage, relative to (say) the US.
Clearly, the rapid erosion of China’s industrial base, with its heavy reliance on commodity exports, such as coal and iron ore, will continue to have a significant effect on Australia’s economy, with probably much more to come.
While our governments are now starting to emphasise the opportunities for our economy in the growth of exports of services – such as education, tourism, financial, legal, architectural, engineering and management services, especially under the recently announced “free trade” agreement, these are unlikely to be significant enough to offset the downside from the fall off in our commodity exports, at least for quite some time.
The key question now is whether there is a genuine risk of a deep and sustained economic growth crisis in China, risking in turn a global recession?
The risk is certainly accelerating as the Chinese authorities are struggling so conspicuously to adjust to the reality of a much slower growing economy.
This article was also published by the Southern Highland News.