China’s growth stopped at 6.5 percent in 2018. And the effects of the trade war have not yet been felt. The real crux is the high level of corporate indebtedness. But the authorities do not seem to have adequate solutions.
China’s growth is slowing. But this time seriously. After three decades of average annual increases of 10 percent (assuming they were true), the "new normal" of 6.5 percent, a target rate announced in 2014 as a new, "contained, but sustainable" pace, already difficult to digest, was hardly reached: the four quarters reported gradually lower rates and the last one did not exceed 6.4 percent. According to the latest data released by the National Bureau of Statistics, 2018 recorded the lowest growth since 1990, and things do not promise to improve because the engines of development are all jammed.
China’s huge industrial sector contracted in December for the first time in two and a half years, according to government data published last week: the Purchasing Manager Index (PMI) has fallen far short of forecasts – at 49, 4 – to indicate a decrease in manufacturing activity compared to the previous month (the critical threshold for SMEs is 50). It is true that services have done much better, marking a 7.7 percent increase compared to last year, but it remains to be seen how the sector, composed mainly of software companies and business services, can keep this pace with industrial output down.
Certainly the Chinese economy is affected by the effects of a very deteriorated commercial scenario compared to the values of the past few years, due to the trade war with the United States. Data show a slowdown in trade: exports increased by only 7.1 percent in 2018 and imports by 12.9 percent, compared to 7.9 percent and 15.9 percent in 2017 (CNN). But for the moment the trade war has less "blame" than you think, because its real effects have yet to manifest themselves; indeed in the past months it may paradoxically have produced contrary results. The US growth data suggests that companies have imported more to accumulate stocks in anticipation of price increases due to customs duties. It is an effect destined to fade soon. Meanwhile, the global slowdown will decrease exports to other markets as well. In fact, other factors are acting and the decline in trade may not be the root cause, or even the most troubling, of China’s slowdown.
The root causes
In 2018, China's economy lost momentum, especially as a result of the government's efforts to contain the high levels of corporate indebtedness. The ratio between assets and liabilities decreased for all – more for public than for private enterprises – and share prices paid the consequences, putting the same companies in difficulty and burning the savings of many families. The main stock exchange index, the Shenzhen Composite Index, lost 33 percent since the beginning of the year, also infecting Western stock exchanges.
If this is the case, we do not see how investments, the only real source of Chinese growth in the last 40 years, can remain stable. Both credit financing and the collection of resources on the stock exchange are more difficult than ever, so many private companies have come to the point of asking or accepting state shareholdings, and, at the same time, many state-owned companies have welcomed private capital. This creates a system of public-private holdings aimed more at covering debt problems than at resolving them. More state holdings in companies often means less productivity and less efficiency, the two strengths of the private production sector in the three glorious decades (1980-2010). There is a massive re-nationalization by local governments of previously privatized companies, a phenomenon already present between 1999 and 2007, but increasing since 2014, with negative consequences on profitability and labor productivity (it is linked to the re-absorption of part of the unemployed). Data at the provincial level show that a greater frequency of re-nationalization is associated with higher reductions in the province's growth rate.
However, the most worrying signals come from consumption data. Although the retail and online sales sector remains buoyant, car purchases, traditionally an indicator of the dynamism of demand, are in sharp decline. According to OICA (International Organization of Motor Vehicle Manufacturers) and Caam (the car manufacturers' association in China) data, in 2018 registrations were 28.1 million, 2.8 percent less than the previous year. This is the first decline since 1990 in the world's largest auto market and a source of profits for many Chinese and foreign manufacturers.
In this context, even the Chinese authorities find themselves short of solutions: in recent decades, the preferred one was easy credit, which today is to be avoided. Tax cuts, rate reductions and new state-funded infrastructure works – the measures introduced so far – may perhaps postpone the worst, but do not avoid it.