Tuesday, China’s National Bureau of Statistics issued the official economic figures for the 3rd quarter of 2011. The headline number, year-on-year GDP growth, came in at 9.1%, down steadily from 9.5% in the 2nd quarter and 9.7% in the 1st.
That morning, I went on Bloomberg TV to offer my perspective on what these numbers may mean. (You can watch my interview here.) The fact that China’s GDP growth is slowing is not, in itself, a problem — in fact, the Chinese government has been trying to engineer a slowdown for almost an entire year now, in order to bring rising inflation under control. The problem as I see it, is twofold:
First, China’s economic growth is still overwhelmingly dependent an ongoing investment boom that has been fueled by cheap and easy credit. According to the NBS release, investment in fixed assets in September continued to grow by an astonishing 24.3% year-on-year (actually accelerating compared to 22.9% in August) despite all the government’s efforts to bring investment back down to more reasonable levels.
China doesn’t need a slowdown as much as it needs a real economic adjustment, away from highly subsidized export- and investment-dependent expansion towards more sustainable consumption-led growth. Virtually everyone inside and outside of China recognizes this, but precious little progress has been made towards stepping off the accelerator and changing gears.
Second, as China’s economy finally comes off these breakneck — and unsustainable — rates of credit-fueled expansion, serious cracks are emerging in its financial system. A lot of people who borrowed money and bet on excessively high growth assumptions — and an unlimited supply of further funding — are finding it harder and harder to pay that money back.
Real estate developers, in particular, have accumulated immense quantities of unsold luxury inventories in the expectation that growth would surge, not slacken. In recent weeks, they’ve started dumping those properties on the market at heavily discounted prices. If developers stop building and prices collapse, local governments that have borrowed sums that are way beyond their revenue means – in the hope that booming land sales would make up the difference — are going to start defaulting on, or renegotiating, their bonds and bank loans. A slowdown in investment-led growth could easily turn into a spiral.
Unfortunately, the steady but moderate decline in China’s growth rate is not evidence of a “soft landing.” A landing, as I see it, means a qualitative as well as quantitative adjustment that puts the Chinese economy on a path to sustainable — rather than hollow and inflationary — growth. By that measure, China hasn’t come in for any kind of landing at all. It’s still circling up there in the stratosphere, not daring to land … all the while, running out of gas.
One quick note: I observed — and the press quickly seized my observation — that the kind of domino effect I described could generate a banking crisis in China. But, as regular readers of this blog already know, I’m not saying that such a “crisis” would play out the same as in the U.S. or Europe. With state lenders, state borrowers, and state regulators acting in collusion, even very serious losses can be brushed under the rug for quite a long time — as they were in Japan, after its real estate and stock bubbles burst in the early 1990s. But – as in Japan — those losses are still real, and they have a very real economic impact.