China has serious structural economic problems, and Chinese and observers should not be misled by skewed GDP data.
At present, in China, we appear to be worried about the
macro-economy. What are we so anxious about? The macroeconomic data
indicates 6.7 percent growth for the first quarter! Compared with the
latest data from countries around the world, 6.7 percent is No. 1. No
other country has a higher growth rate than China. Even if it is
somewhat overstated, and the rate was only 6.5 percent, or even 6
percent, we’d still be the highest in the world. What are we worried
about? I think we should worry about the underlying structural problems
of China’s economy, not the macro data.
Bad Loans
We are seeing many statements and interpretations about why China’s
economy is in trouble. In my view, the main problem stems from prominent
structural contradictions within industries. Bank data clearly shows
that challenges indeed exist for many traditional manufacturing
industries, such as iron, steel, coal, photovoltaic, electrolytic
aluminum and cement. Many companies, including steel and coal companies,
have trouble making loan payments. Some businesses in these industries
are doing well, but others are doing very poorly.
As for the real estate market, it is doing very well in Beijing,
Shanghai, Shenzhen, and Hangzhou, but the market is very bad in a lot of
tier-three and tier-four cities in the Northeast and Northwest.
Social Inequality
There is also the issue of the income gap. We have a lot of rich
people in China today. Chinese worth $1 billion are considered
super-rich, and their number has surpassed those in the United States.
However, there are still 100 to 200 million people in China who are
extremely poor. This gap between social groups creates very serious
conflicts.
Speculation
Another structural contradiction exists between China’s virtual and
real economies. In fact, a lot of money does not flow into the real
economy, but flows instead into the virtual economy, such as
speculation.
In recent years monetary expansion has been very fasts, reaching very
large numbers. Why is it so very difficult and expensive for the real
economy to obtain financing? I have always said that although the
quantity of money and credit are high, the lending policy structure is
extremely unreasonable. Data released by the People’s Bank indicates
that the real estate industry receives 41 percent of all loans made.
Real estate tycoons state that real estate contributes a lot to the
Chinese economy. How much is its contribution? Although the real estate
industry is considered a pillar industry in China, its 21 percent
contribution takes away 41 percent of financing.
Structural Imbalance
Our main economic worry in China is, in fact, not whether the GDP
rate is 6.7, 6.6 or 6.5 percent. Our concern is about structural
imbalance, structural vulnerability, and structural risks.
Structural reform of the supply-side has been discussed during the
most recent meeting of the Central Leading Group for Financial and
Economic Affairs. The need to reduce ineffective supply, production
capacity and inventory, and the need to de-leverage, were clearly
pointed out. So, the problem with China’s economy is not about the
growth rate of the consumer price index (CPI) or the GDP. These macro
level data are merely averages that do not reveal the underlying
structural problems.
Inflation
In China the CPI does not reflect real inflation. The reason is
simple. Key inflation indicators included in China’s CPI are mostly
manufacturing products. The most important items that impact people’s
lives are not included, or only a small number are included. For
example, real estate, education, and health care expenses are not
reflected in the CPI. How can this CPI truly reflect inflation?
Classical economics talks about the Misery Index, and in my opinion
this is a more accurate reflection inflation. Today, a CPI level of 2.3
percent means deflation in China. But we cannot just mention a few
industries when talking about inflation. We cannot only cover
traditional manufacturing or industrial products. Let’s be fair! Whether
it’s Chinese people in urban or rural areas, their biggest concern is
not to buy an iPhone or a car, but to buy an apartment, send children to
a good school, and obtain affordable medical services. These are
people’s foremost needs these days.
When adding in these factors, real inflation is not 2.3 percent at
all. If you tell the people on the street that there is no inflation in
China, will they believe you? Food prices have gone up 7.4 percent, and
this alone has had a great impact on low-income earners. I would say,
without exaggeration, that China has a serious inflation issue.
Can we continue to maintain steady growth using massive monetary
expansion and stimulus programs? Economics has its own rules. I am here
to raise a warning flag.
This is an abridged translation of a lecture by Xiang Songzuo that was subsequently published on the aggregator website Consensus Net on May 18, 2016. Xiang is the chief economist at the Agricultural Bank of China.
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