by The Economist
WHEN Li Keqiang, China’s prime minister, spoke at a big business meeting earlier this month, he trumpeted two achievements. Not only had the government overseen steady economic growth, he said, but it had done so without resorting to a big stimulus. Both assertions are now looking rather doubtful.
A barrage of data for August pointed to a sudden weakening in growth, catching many analysts and investors by surprise. Although it is unwise to read too much into one month’s numbers, the figures had a distressingly uniform downward tilt. Investment, retail sales and credit issuance all slowed. Industrial output, which is closely correlated with GDP given the size of China’s manufacturing sector, grew at its weakest pace since late 2008, when the global financial crisis was battering the economy. Housing sales, already struggling, contracted further; they have fallen 8% so far this year. That has started to eat into the revenues of local governments, since property developers are holding back on land purchases. Yao Wei of Société Générale, a French bank, called it a “shockingly sharp” deceleration.
Until the gloomy data started to pile up, China’s economy had seemed to be following an established pattern. A wobbly start to 2014 had prompted the government to come up with a series of policies to revive growth. It sped up spending on infrastructure and cheap housing, while the central bank administered a small dose of monetary easing. In 2012 and again in 2013 measures of more-or-less the same design had been enough to keep the economy going. But this year the jolt lasted for little more than a month before petering out.
Trouble in the property sector, which directly accounts for about 15% of China’s GDP, is the biggest single factor. A glut of unsold homes has started to weigh on the market. Inventories at listed developers rose by a quarter in the first half, reaching 65% of their assets, an all-time high, according to CICC, a Chinese investment bank. The pain is even spreading to the biggest cities, especially in suburbs where building has been most frenetic. In Jiading, a northern district of Shanghai, the streets are lined with ads for new homes, yet the showrooms of its sprawling developments receive few visitors.
The good news is that property is getting more affordable: the average home costs about 8.8 times the annual income of the average Chinese household, down from nearly 12 times in 2010, according to an index calculated by the Economist Intelligence Unit, a sister company of The Economist. The bad news is that the market may yet be far from bottoming out.
Another reason for the economy’s weakness is Mr Li’s desire to wean the economy off its rising dependence on debt, which has soared to more than 200% of GDP. China has not yet started deleveraging, but credit is at least growing more slowly as regulators force banks to hold more capital to cover loans they have kept off their balance-sheets. When the prime minister spoke at a World Economic Forum event in Tianjin on September 10th, he had surely been briefed in advance about the poor August data. Yet he still persisted in ruling out a “strong economic stimulus” and instead emphasised the importance of reforms—an indication that the government will tolerate the current slowdown.
Mr Li, though, is not willing to let the slowdown turn into a rout. On September 16th, local media reported that the central bank had injected 500 billion yuan ($81 billion) into the financial system via loans to big banks. It is customary for the central bank to pump out cash before China’s two annual weeklong holidays, one of which begins in early October, as demand for money spikes. But the special loan was far bigger than anything of its kind in the past.
The central bank did not actually announce the loan, doubtless because it did not want to look like it was going back on Mr Li’s pledge to refrain from stimulus. Instead, word of it spread on Sina.com, a web portal. “Because it is so low profile, a large part of the effectiveness is wasted,” says Larry Hu of Macquarie Securities. Evidence from earlier this year is that stealthy forms of monetary easing do not have a lasting impact, since businesses are uncertain about what the government actually intends. Mr Li himself appears uncertain. Refraining from large-scale stimulus is the right medicine for the economy in the longer term. But there is no sense in pretending that fast growth can be sustained this year without it.