Transcript Bottelier Presentation - Carnegie Endowment for International Peace

China’s Economy in the PostCrisis World
Carnegie Endowment for International Peace
Washington DC, 17 March, 2010
Pieter Bottelier
Main points
1. China’s stimulus program is huge and has been very
effective.
2. Since March 2009 output-, employment- and
confidence indicators have continuously improved.
3. But problems have arisen: inflation, property
bubbles, housing affordability, trade tensions.
4. The government recently embarked on a cautious
exit strategy from credit-driven stimulus program.
5. Barring major policy mistakes and assuming no
second dip in US,EU, near-term growth prospects
are good.
2
Main objectives of stimulus program
1. Quickly revive employment and stimulate domestic
demand (to compensate for falling exports)
through:
- massive consumer loan- and subsidy programs
- infrastructure investment, especially in less-developed
provinces
- revival of urban real estate markets
2. Reduce China’s dependence on consumer markets
in the West by:
- promoting South-South trade and investment
- tightening economic relations between the Mainland, Taiwan &
HK
- promoting internationalization of the RMB
3
Quarterly GDP growth y/y & q/q
GDP Growth, percent
China GDP Growth, Quarterly
20
18
16
14
12
10
8
6
4
2
0
GDP growth, year-on-year
GDP growth, quarter-on-quarter(SA)*
4
What explains the success of China’s stimulus
program so far?
• The program was well designed, initiated only 6 weeks after
Lehman’s collapse and generously funded, especially with bank
credit.
• China was not overleveraged like the U.S. Stimulus money
immediately translated into incremental aggregate demand.
• Governments at all levels had relevant experience, and the
country’s fiscal position was strong.
• Central and local government interests were fully aligned.
• After 10 years of intensive reform, China’s commercial banks were
in good condition and had ample liquidity.
5
China’s stimulus-driven growth pattern
is obviously not sustainable
• M2 and credit expansion in 2009 over 30%!
• Investment accounted for 8 ppts out of 8.7%
GDP growth in 2009.
• Domestic demand in 2009 grew 12.3%! (i.e.
8.7% plus 3.6% negative contribution of netexports).
Note: unsustainability is in the nature of
stimulus programs.
6
The stimulus program was mainly debtfinanced
China new monthly lending and growth(3m/3m)
RMB, Billion
2000
300%
1800
250%
1600
200%
1400
150%
1200
New Loan growth 3m/3m
1000
100%
800
50%
600
0%
400
-50%
200
Feb-10
Jan-10
Dec-09
Nov-09
Oct-09
Sep-09
Aug-09
Jul-09
Jun-09
May-09
Apr-09
Mar-09
Feb-09
Jan-09
Dec-08
Nov-08
Oct-08
Sep-08
Aug-08
-100%
Jul-08
0
7
The allocation of stimulus funds is not yet
known, but a rough guess is: (source: Bottelier)
• Infrastructure : 50%
• Low-cost housing and other real estate: 20%
• Corporate investment and working capital: 9%
• Consumer loans and -subsidies: 10%
• Additional spending for social sectors: 7%
• Tax reductions and other: 4%
Note: Government tried to avoid channeling
significant additional resources to industries
already in excess capacity.
8
Is China is getting over-leveraged?
Debt (% of GDP) – based on 2009 data for China; 2008 for other countries,
except Singapore (2007)
Government Debts
Consumer loans
Corporate loans
Corporate bonds
300%
12%
250%
78%
200%
68%
15%
47%
4%
150%
7%
12%
65%
12%
75%
113%
100%
99%
1%
39%
57%
65%
13%
140%
43%
50%
54%
16%
18%
62%
73%
39%
49%
30%
0%
38%
Singapore
Taiwan
Hong Kong
China*
Korea
1%
19%
7%
10%
14%
0%
Japan
44%
Thailand
India**
Indonesia
9
Downside risks
–
–
–
–
–
–
–
–
–
Rising consumer price inflation, 2.7% in February y/y.
Rising producer price inflation, 5.4% in February y/y.
Rising wages due to labor shortages!
High leverage in the construction sector.
(Leverage in the household sector is rising, but still
low; average mortgage loan/value ratio under 50%).
NPL growth in the years ahead.
International trade protectionism .
Sino-US tensions over Taiwan arms sales and other
issues.
Reduced international business confidence (although
FDI is still increasing).
10
Share prices rose fast in 2009, but are
not in bubble territory
Shanghai Composite Index(December 2006=100)
250
200
150
100
50
0
11
Uncertainty about local government debt
• Borrowing by local government-owned
construction companies (investment groups) is
not recorded as public debt.
• Total de-facto local government debt could be as
high as 30% of GDP (Victor Shih).
But mitigating factors are:
1. Loans are backed by real assets (usually land);
2. Many projects are revenue-earning;
3. Assets and liabilities all within the public
sector.
12
Uncertainty about the extent of urban
property price increases
• High-end residential markets in bubble
territory, but full extent of problem is not clear
• Commercial property prices have peaked; is it
true that this is not causing problems for
banks?
• Head of NBS admitted to NPC delegates that
house price index for 70 major cities may be
faulty.
13
This is the chart that NPC delegates did not
believe – according to poll, housing affordability
has sharply declined and is top public concern
China house prices in 70 major cities (annual % change)
12
10
% change(Y/Y)
8
6
4
2
0
-2
14
China’s trade surplus in 2009 reduced by one-third –
to $196 billion. Not clear what lies ahead.
China Merchandise Trade
Billions, US$
160
140
120
100
Exports
80
Imports
60
Trade Balance
40
20
Dec-09
Nov-09
Oct-09
Sep-09
Aug-09
Jul-09
Jun-09
May-09
Apr-09
Mar-09
Feb-09
Jan-09
Dec-08
Nov-08
Oct-08
Sep-08
Aug-08
Jul-08
Jun-08
May-08
Apr-08
Mar-08
Feb-08
Jan-08
0
15
Is China serious about rebalancing its
growth model?
• Yes, but it will take years and require additional policy
changes, including exchange rate and interest rate action.
• The national savings rate (50% in 2008!) will have to
come down.
• Since 1999 too much investment went into
manufacturing; this contributed to China’s large trade
surplus and excess capacity problem.
• The government is trying to reduce Coast-Interior
imbalances by concentrating infrastructure investment in
less developed provinces.
• Income inequality and wealth gaps will probably
continue to widen for some time.
16
The problem does not lie in slow consumption growth,
which is perhaps the highest in the world
0.15
China
0.1
India
0.05
Korea
US
Germany
UK
0
Japan
-0.05
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
17
In 2009 private consumption and total
consumption grew faster than GDP
• Central government spending on social sectors
increased sharply (e.g. health +48% and
education +28%).
• Private consumption also grew fast (probably
over 9%), but may slow when subsidies and
loan programs are throttled back.
18
International experience suggests that a county’s
consumption/GDP ratio begins to rise when per capita
income reaches about $9,000 (in PPP) – China is close
19
Concluding thoughts
• The U.S. has ceased to be a model for China’s
economic reforms – this has both economic
and political consequences.
• The crisis has confirmed the government’s
belief that the state should have a major role
in the economy.
• China is trying to reduce dependence on
Western consumer markets.
• China will reduce economic imbalances, but
slowly.
20