Global Economics

China's Economy Rebounds, but Is It Rebalancing?


Fixed asset investment still appears to be China's main economic driver

Photograph by Meridith Kohut/Bloomberg

Fixed asset investment still appears to be China's main economic driver

China’s GDP has picked up, growing 7.8 percent in the third quarter. That compares with 7.5 percent in the three months from April through June and 7.7 percent in the first quarter of the year. The acceleration has sparked hopes that China’s economy has finally rebounded after two quarters of weakening growth.

“I expect the recovery to continue until maybe the first quarter of next year or even the first half,” Li Daokui, economics professor at Tsinghua University in Beijing and a former academic adviser to China’s central bank, told Bloomberg News before the data release.

“China’s economy has maintained a steady growth with major indicators staying within the rational range,” said National Bureau of Statistics spokesman Sheng Laiyun at a Beijing press conference on Oct. 18, reported Xinhua.

So what were the other indicators and what do they suggest about Beijing’s progress on rebalancing? China’s leaders want to reduce the economy’s reliance on investment, while expanding household consumption, which now accounts for around 35 percent of the economy, about one-half the 70 percent rate in the U.S. They want to “unlock the power of the middle class to consume,” says Randall Kroszner, an economist at the Chicago Booth School of Business and a former member of the U.S. Federal Reserve’s Board of Governors.

Unfortunately, there is still not a lot of evidence China is making that economic transition. Fixed asset investment, for example, still appears to be the main economic driver. It rose 20.2 percent in January through September (compared to a 20.3 percent rise the year through August). And industrial production grew 10.2 percent in September, down from 10.4 percent in August, “but production has generally been on a slow upward trend through the year,” wrote Matthew Circosta, Sydney-based economist for Moody’s Analytics, in an Oct. 18 note.

“The ‘mini-stimulus,’ which involved ramping up public spending on railway, energy and infrastructure projects, has driven a sharp acceleration in steel output, and also supported cement and metals production. The central bank also eased monetary conditions,” he wrote. “It appears the Chinese government has reverted back to the investment playbook.”

Meanwhile, retail sales grew by 13.3 percent in September, down slightly from 13.4 percent the previous month. That’s decent, but not strong enough to make a big difference when it comes to shifting to a more consumer-driven economic growth model. “Growth was mainly driven by investment,” contributing 4.3 percentage points, compared with 3.5 percentage points from consumption, year-to-date, wrote Shuang Ding and Minggao Shen, economists at Citigroup in Hong Kong, in an Oct. 18 research note.

“There is little, if any, sign of internal rebalancing,” cautioned Sydney-based economist Glenn Levine at Moody’s Analytics, in an Oct. 18 note. “The second-half economic acceleration is largely an investment story, linked to the government’s latest stimulus. The consumer sector is important, but too small and growing too slowly to be a key driver of the broader economy.”

Dexter_roberts
Roberts is Bloomberg Businessweek's Asia News Editor and China bureau chief. Follow him on Twitter @dtiffroberts.

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