For the third quarter running, China's GDP growth was 6.7%, with the economy's subsectors growing at around the same rate. This indicator has been remarkably stable, which seems to confirm that Beijing is employing budgetary and monetary stimulus to attain the full-year GDP growth target of 6.5-7%. With economic activity stabilising, the government is likely to engage in less infrastructure spending, which will in turn limit the 2017 GDP growth outlook.
In the longer term, however, the government will not be able to ignore problems like the high level of debt, production overcapacity, a declining return on productive investments and only limited progress in the area of structural reforms. The use of the 'traditional' levers of credit and infrastructure spending to maintain current growth levels will end up exacerbating structural imbalances and only make it more difficult to solve these problems in the future.
The individual sectors do not point to any significant change in Chinese growth trends. The secondary sector (+6.1%), which includes manufacturing and construction, is still in the consolidation phase that began at the end of 2015, while the tertiary sector has picked up (+7.6%) following the sharp deceleration experienced previously in the financial sector.
Some subsectors of the economy that historically show divergent growth levels are now quite comparable: they range from +5.6% for the financial sector, which has been slowing after the 2015 financial bubble burst, to +8.8% for the property sector, which has been buoyed by the rise in lending (see left-hand chart).
After four years of deflation, producer price inflation has returned to positive territory thanks mainly to rising commodity prices. This is providing a breath of fresh air to the manufacturing sector, which is still hampered by production overcapacity (see right-hand chart).
In September, new loans amounted to CNY 1.720 trillion. This amount is lower than those seen at the start of the year during the peak of the government’s stimulus effort, but is still quite high relative to historical levels. The growth in bank lending is less volatile and remains unchanged at 13%, which is lower than at the start of the year.
These figures suggest that, with Chinese GDP growth now levelling off, the government is likely to dial down its infrastructure spending, which is financed by intensive credit creation. This view is reinforced by the message that Beijing has conveyed to banks instructing them to rein in mortgage lending and bring shadow banking under control. That said, even if credit is held in check, it is still a policy tool that the government can use to significantly influence the course of domestic economic activity (see left-hand chart).
There is a limit to how much the government can count on the use of credit. Since 2010, China has experienced a sharp rise in its debt level relative to the added value generated by its economy. There is little risk of implosion, in view of limited capital account openness and the high level of domestic savings (46% of GDP). But the government’s desire to open Chinese financial markets to the world will be thwarted by such a high level of debt, especially since cleaning up bank balance sheets does not appear to be on the agenda.
This situation is particularly worrisome given the fact that the use of credit has changed little since the major stimulus plans of 2009. Capital investments remain high, but they are often concentrated in unprofitable sectors and projects. This is true for the entire manufacturing economy and is especially apparent in state-owned enterprises (see right-hand chart).
In conclusion, the effects of the stimulus measures put in place at the start of the year should continue to be felt through the end of 2016. China should end the year with GDP growth in line with its target of 6.5-7%. We have therefore adjusted our GDP growth forecast to 6.70% for 2016.
Yet growth in 2017 is likely to be hurt by the restrictive measures adopted by a number of large cities in response to an overheating property market and by the scaling back of credit creation. If the government decides to support economic growth in the short and medium term by delivering more stimulus to the real economy, it will have to deal with a number of issues sooner or later, including the debt level, the declining marginal return on productive investments and the failure to make more progress on structural reforms aimed at boosting consumer spending. With this in mind, the effort to hit current GDP growth targets will exacerbate structural imbalances and make it more difficult to achieve the long-term objectives of opening up Chinese financial assets to international investors and expanding the proportion of consumer spending in the economy.