Steel pipes are seen at a port to be loaded onto ships for export to various countries in Lianyungang, eastern China's Jiangsu province on December 1, 2015. Chinese manufacturing activity contracted at its fastest rate for more than three years in November, official data showed on December 1, underlining weakness in the world's second-largest economy. CHINA OUT AFP PHOTO / AFP / STR (Photo credit should read STR/AFP/Getty Images)

This week the Chinese government will attempt to take back control of the narrative. The release of its 2015 economic growth estimate on January 19 provides an opportunity for Beijing to argue that a renewed outburst of stock market chaos and currency policy confusion over recent weeks was just surface noise, while the underlying economy remains sound.

That China’s once-vaunted economic managers suddenly find themselves in this position is a reminder of how dramatically they too can be wrongfooted by events, albeit ones that were under their control until a series of self-inflicted policy errors.

Until China’s stock market bubble burst on June 15 — President Xi Jinping’s birthday of all days — the rest of the world was obsessed with the country’s downwards economic growth trajectory.

An ill-advised stock market rescue in July, followed by a poorly communicated currency policy adjustment in August, gave the world a bigger issue to worry about — the competence of China’s leadership, or lack thereof. In this context, the second and third-quarter gross domestic product estimates, in line with the government’s 7 per cent growth target, were reassuring.

Chinese officials now freely admit that the country’s growth story is a tale of two economies. There is the bad old industrial economy — credit-fuelled and investment-led, resulting in chronic overcapacity and unsold apartment blocks. And there is the good new services economy — innovative and consumption-driven.

Their key point is that the rise of the latter will balance the decline of the former, as has been the case this year. As a result, they argue, the overall economy will hum along at a “sustainable” rate of about 6.5 per cent over the next five years.

This spells trouble for the African, Australian, Russian and South American commodity producers who have grown fat off Chinese demand over the past 20 years. But it should benefit European and US service providers, market access permitting, as well as Japanese and South Korean gadget makers.

If only it were that simple.

There are at least two known unknowns that could disrupt China’s smooth glide path. The first is what happens to rust-belt regions that have plenty of the old economy but not much of the new. “It will be very difficult for those who work in the old economy to transition into the new economy,” says Chen Long, China economist at Gavekal Dragonomics. “Coal miners do not become internet programmers overnight, or even delivery men.”

The second is a potential debt crisis of historic proportions, stemming in part from the government’s fears about the consequences for coal country if they were to turn off the credit taps. In 2007, on the eve of the global financial crisis, China’s overall debt to GDP ratio was 147 per cent. Now it is at 231 per cent and climbing.

“They absolutely have no room left for further debt accumulation,” says Rodney Jones at Wigram Capital, an economic advisory firm. “That’s the central issue — not the exchange rate, not the stock market. These are symptoms. The problem is unsustainable growth and continued rapid accumulation of debt, leverage and credit.”

On Friday, the government said that new borrowing surged to Rmb1.7tn ($260bn) in December, the biggest monthly increase since January.

In a China-watching community where those at the extremes — “maximum” bulls and “coming collapse” Cassandras — often make the most noise, Jonathan Anderson at the Shanghai-based Emerging Advisors Group has long been regarded as one of the most thoughtful analysts. For years he laid out a convincing case for cautious optimism on the Chinese economy, but not any more.

“For years we have been waiting for China to make the tough choice and sacrifice near-term growth in order to stabilise macro balance sheets and stop its exploding debt cycle,” he wrote on January 4, the first day of this month’s market and currency mayhem. “[But] the costs of taking real adjustment are clearly too high for the government to bear . . . Right now we put the initial potential crisis threshold at around five years.”

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