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China to grow faster than expected in 2022
Shift from real estate to industrial investment sets the stage for more productivity driven economic growth
By DAVID P. GOLDMANNOVEMBER 6, 2021
A Chinese worker is seen at a spinning factory in Xingtai City, Hebei province. Photo: Xinhua
China’s lower-than-forecast 4.9% gross domestic product (GDP) growth rate in the third quarter of 2021 was mainly an artifact of state management, and to a smaller extent the result of state blunders.
Regulators threw the country’s most levered property developers under the bus, and engineered a recession in the real estate sector, which accounts for a quarter of China’s GDP.
The country continued to grow first of all because consumption growth stayed on trend, and secondly because of strong net exports. Severe energy shortages, the consequence of unintended consequences of environmental measures and ill-considered utility regulation, also depressed third-quarter growth.
The People’s Bank of China has little room to respond to the air-pocket in growth with easier money. De-leveraging is the main depressant on growth, and a renewed increase in leverage would defeat the central bank’s purpose.
Producer prices rose 10.7% year-on-year as of September 2021. While consumer prices are little changed, the risk of inflation constrains monetary policy. China will have to rely on private-sector manufacturing and service growth to offset the real estate slump.
Underlying the short-term economic moves is China’s long-term effort to raise productivity, first by shifting investment towards manufacturing and services and away from construction, and secondly by cultivating Fourth Industrial Revolution technologies.
De-levering in the property sector and other parts of the economy, though, works at a different tempo than the long-term impact of industrial investment and new technologies. China’s overall growth is unlikely to pick up significantly before 2022.
The chart above shows the Chinese government’s breakdown of contributions to GDP growth (it is a bit confusing because the metric is a percentage of a percentage). Consumption accounted for 79% of the overall 4.9% growth rate, and net exports accounted for 22%. Investment was a net drag on GDP.
China has an extremely high ratio of investment to GDP, so the fact that the third quarter showed any growth at all despite declining investment points to resilience on the part of the country’s consumers, who shrugged at the decline in home prices, as well as China’s exporters, who registered a 31% year-on-year increase in foreign shipments as of September 2021.
The GDP consumption data are consistent with retail sales reports, which show that shoppers returned to the pre-pandemic trend during the third quarter. The retail sales data below are seasonally adjusted with the standard TRAMO procedure using Eviews econometric software.
Electricity rationing due to a shortage of steam coal also had a mildly depressing impact on Chinese third-quarter growth. Unlike the crackdown on credit to the property sector, the power crisis was a self-inflicted injury.
A mismatch in regulation between coal mining, where environmental and safety rules suppressed output, and price regulation of utilities, which had little flexibility to pass on higher costs to their customers, led to a wave of power outages.
China’s boycott of Australian coal in punitive response to Australian demands for an investigation of the origin of the Covid-19 virus also limited supplies.
The price of coal in China, as well as Australia, more than tripled between the beginning of 2021 and the end of the third quarter. Coal prices collapsed after China took emergency measures to increase coal production and quietly began unloading Australian coal.
The worst of the power shortage appears to be over, and that should provide a modest boost to fourth-quarter GDP.
An important underlying trend that show through the quarterly data is a shift away from real estate investment towards manufacturing investment. From the middle of 2018 to the first quarter of 2021, real estate investment exceeded manufacturing investment, but manufacturing investment pulled ahead during 2021.
The chart below shows the Chinese government’s measure of investment as a cumulative year-on-year change for the two sectors.
Chinese data for bank lending to industry versus real estate development shows the same picture. In 2018 real estate loans surpassed industrial loans, but industry loans pulled ahead during the second and third quarters of 2021.
As noted, real estate now comprises a quarter of China’s GDP. Over time the sector’s contribution to GDP should fall to about 15%-20%. Although the wave of urbanization has crested, China’s urbanization rate is still only 60%, compared to an 80% average for middle-income developing countries.
Chinese cities can expect to absorb 15 million migrants from the countryside annually for the next 20 years, requiring an investment of $200,000 per individual in housing and infrastructure, or $3 trillion a year.
That’s 20% of China’s present GDP, although the percentage share will fall over time as GDP grows.
Urbanization will require more construction in western and central Chinese cities where home prices are lower than on the coast, as well as more low-cost public housing. Because so much urban land has been withheld from development, Chinese cities have considerable room to build lower-cost housing by releasing land.
The key to China’s future growth, though, rests on productivity gains. China now accounts for a third of the world’s manufacturing and buys more than a third of the world’s industrial robots.
So-called Fourth Industrial Revolution technologies (self-programming industrial robots, “smart” cities with autonomous vehicles, “smart logistics,” and other AI-driven initiatives) have the potential to transform the country over the next ten years.
With 70% of the world’s installed 5G infrastructure, China has built the preconditions for a productivity breakout.
But this won’t occur quickly. As Asia Times reported previously, Huawei alone has more than 15,000 contracts to build private factory 5G networks and more than 5,000 contracts for mines. That is a big number, but China has more than two million factories. It will take the better part of a decade for the productivity impact to be felt at the macro level.
Still, China doesn’t have much of a choice in the matter. The growth impetus of the past 40 years came from urbanization. Low-productivity farmers moved to cities and became semi-skilled industrial workers, and per capita GDP rose ten-fold between 1993 and 2020.
Now the children of the semi-skilled industrial workers attend university to an increasing extent. Just 2% of Chinese aged 50 have a university degree, compared to 27% for Chinese aged 30. A majority of high school graduates today aspire to tertiary education, and a third will reportedly study engineering.
The upshift in productivity that China’s leadership envisions will not be easy to execute. Neither was the transfer of 600 million Chinese from the countryside to cities.
asiatimes.com
Shift from real estate to industrial investment sets the stage for more productivity driven economic growth
By DAVID P. GOLDMANNOVEMBER 6, 2021
A Chinese worker is seen at a spinning factory in Xingtai City, Hebei province. Photo: Xinhua
China’s lower-than-forecast 4.9% gross domestic product (GDP) growth rate in the third quarter of 2021 was mainly an artifact of state management, and to a smaller extent the result of state blunders.
Regulators threw the country’s most levered property developers under the bus, and engineered a recession in the real estate sector, which accounts for a quarter of China’s GDP.
The country continued to grow first of all because consumption growth stayed on trend, and secondly because of strong net exports. Severe energy shortages, the consequence of unintended consequences of environmental measures and ill-considered utility regulation, also depressed third-quarter growth.
The People’s Bank of China has little room to respond to the air-pocket in growth with easier money. De-leveraging is the main depressant on growth, and a renewed increase in leverage would defeat the central bank’s purpose.
Producer prices rose 10.7% year-on-year as of September 2021. While consumer prices are little changed, the risk of inflation constrains monetary policy. China will have to rely on private-sector manufacturing and service growth to offset the real estate slump.
Underlying the short-term economic moves is China’s long-term effort to raise productivity, first by shifting investment towards manufacturing and services and away from construction, and secondly by cultivating Fourth Industrial Revolution technologies.
De-levering in the property sector and other parts of the economy, though, works at a different tempo than the long-term impact of industrial investment and new technologies. China’s overall growth is unlikely to pick up significantly before 2022.
The chart above shows the Chinese government’s breakdown of contributions to GDP growth (it is a bit confusing because the metric is a percentage of a percentage). Consumption accounted for 79% of the overall 4.9% growth rate, and net exports accounted for 22%. Investment was a net drag on GDP.
China has an extremely high ratio of investment to GDP, so the fact that the third quarter showed any growth at all despite declining investment points to resilience on the part of the country’s consumers, who shrugged at the decline in home prices, as well as China’s exporters, who registered a 31% year-on-year increase in foreign shipments as of September 2021.
The GDP consumption data are consistent with retail sales reports, which show that shoppers returned to the pre-pandemic trend during the third quarter. The retail sales data below are seasonally adjusted with the standard TRAMO procedure using Eviews econometric software.
Electricity rationing due to a shortage of steam coal also had a mildly depressing impact on Chinese third-quarter growth. Unlike the crackdown on credit to the property sector, the power crisis was a self-inflicted injury.
A mismatch in regulation between coal mining, where environmental and safety rules suppressed output, and price regulation of utilities, which had little flexibility to pass on higher costs to their customers, led to a wave of power outages.
China’s boycott of Australian coal in punitive response to Australian demands for an investigation of the origin of the Covid-19 virus also limited supplies.
The price of coal in China, as well as Australia, more than tripled between the beginning of 2021 and the end of the third quarter. Coal prices collapsed after China took emergency measures to increase coal production and quietly began unloading Australian coal.
The worst of the power shortage appears to be over, and that should provide a modest boost to fourth-quarter GDP.
An important underlying trend that show through the quarterly data is a shift away from real estate investment towards manufacturing investment. From the middle of 2018 to the first quarter of 2021, real estate investment exceeded manufacturing investment, but manufacturing investment pulled ahead during 2021.
The chart below shows the Chinese government’s measure of investment as a cumulative year-on-year change for the two sectors.
Chinese data for bank lending to industry versus real estate development shows the same picture. In 2018 real estate loans surpassed industrial loans, but industry loans pulled ahead during the second and third quarters of 2021.
As noted, real estate now comprises a quarter of China’s GDP. Over time the sector’s contribution to GDP should fall to about 15%-20%. Although the wave of urbanization has crested, China’s urbanization rate is still only 60%, compared to an 80% average for middle-income developing countries.
Chinese cities can expect to absorb 15 million migrants from the countryside annually for the next 20 years, requiring an investment of $200,000 per individual in housing and infrastructure, or $3 trillion a year.
That’s 20% of China’s present GDP, although the percentage share will fall over time as GDP grows.
Urbanization will require more construction in western and central Chinese cities where home prices are lower than on the coast, as well as more low-cost public housing. Because so much urban land has been withheld from development, Chinese cities have considerable room to build lower-cost housing by releasing land.
The key to China’s future growth, though, rests on productivity gains. China now accounts for a third of the world’s manufacturing and buys more than a third of the world’s industrial robots.
So-called Fourth Industrial Revolution technologies (self-programming industrial robots, “smart” cities with autonomous vehicles, “smart logistics,” and other AI-driven initiatives) have the potential to transform the country over the next ten years.
With 70% of the world’s installed 5G infrastructure, China has built the preconditions for a productivity breakout.
But this won’t occur quickly. As Asia Times reported previously, Huawei alone has more than 15,000 contracts to build private factory 5G networks and more than 5,000 contracts for mines. That is a big number, but China has more than two million factories. It will take the better part of a decade for the productivity impact to be felt at the macro level.
Still, China doesn’t have much of a choice in the matter. The growth impetus of the past 40 years came from urbanization. Low-productivity farmers moved to cities and became semi-skilled industrial workers, and per capita GDP rose ten-fold between 1993 and 2020.
Now the children of the semi-skilled industrial workers attend university to an increasing extent. Just 2% of Chinese aged 50 have a university degree, compared to 27% for Chinese aged 30. A majority of high school graduates today aspire to tertiary education, and a third will reportedly study engineering.
The upshift in productivity that China’s leadership envisions will not be easy to execute. Neither was the transfer of 600 million Chinese from the countryside to cities.
China to grow faster than expected in 2022 - Asia Times
China’s lower-than-forecast 4.9% gross domestic product (GDP) growth rate in the third quarter of 2021 was mainly an artifact of state management, and to a smaller extent the result of state blunders. Regulators threw the country’s most levered property developers under the bus, and engineered...
asiatimes.com
build a toilet first bro
