Turning the corner
The fourth quarter of 2012 appears to have been a turning point. Growth accelerated moderately and will likely continue to do so in 2013. The revival of the economy came from a number of sources, not the least of which was government stimulus. Such spending was heavily weighted toward investment in railways, which was up 50 percent in the fourth quarter from a year earlier. Such investment had been severely curtailed following a serious accident in 2011. This type of spending should continue to rise in 2013.
In addition, export growth rebounded in the fourth quarter after a difficult period. The rate of increase of exports to both the United States and other Asian countries increased, and the decline in exports to Europe decelerated.
Domestic demand also accelerated. Real estate investment, which had decelerated for much of the past year, finally accelerated in the fourth quarter. Retail sales rebounded as well, growing 15 percent in the fourth quarter. Still, retail sales decelerated in January as the government’s crackdown on excessive spending by officials took a toll. Traditionally, the Chinese New Year is a time for gift giving, and the new government’s crackdown on extravagance had a negative impact on the growth of retail sales. However, going forward retail sales should continue to rise at a healthy pace.
Finally, accumulation of inventories decelerated dramatically, suggesting that future increases in demand will be met by increased production. Indeed, industrial production has already started to accelerate. Also, corporate profits were up in the past three months, having declined for much of 2012. This means that businesses have a bit more pricing power and are no longer facing a zero-sum environment.
The bottom line is that the economy is now set to grow moderately faster in 2013 than in 2012.
The bottom line is that the economy is now set to grow moderately faster in 2013 than in 2012. The government appears willing to use modest stimulus to keep growth from sputtering. This will, of course, include spending on infrastructure. However, recent statements suggest that the government is concerned about avoiding unproductive investments. Indeed, spending on unproductive investments was a serious problem during the stimulus of 2008–2009, and the government appears keen to avoid mistakes of the past. Moreover, given that inflation appears to have bottomed, the central bank will be reluctant to provide too much credit lest inflation gets out of hand once again. Still, the government has not indicated how it intends to deal with the continued growth of the shadow banking sector.
As Chinese growth continues to come largely from domestic rather than export demand, it is worth noting that there has been a decline in foreign direct investment (FDI) into China. In January, FDI was down 7.3 percent from a year earlier. Why is this? Foreign interest in sourcing manufactured goods from China is declining because of rising costs of production in China. Wages of migrant workers are up 12 percent from a year earlier, and the labor force has stopped growing. Hence, labor costs are likely to continue rising. Plus, the currency is expected to rise in value. The result is that global manufacturers are increasingly looking at other locations such as Vietnam and Indonesia.
China’s new leadership is starting to demonstrate the direction it wants to take. The State Council recently approved a 35 point plan designed to correct China’s widening income disparity. But it goes beyond that; the plan would have the effect of moving toward a more market-driven economy in which state-run enterprises have less power and engage in less investment. The specifics include the following:
- The minimum wage will be boosted to at least 40 percent of average salaries.
- Interest rates on deposits and loans will be freed, allowing the financial system to work on a market basis. Savers will obtain a better return, which may encourage them to save less and consume more. Borrowers will face higher costs and will, consequently, be encouraged to invest only in those projects that offer the promise of a good return.
- State-owned enterprises will have to return a larger share of their earnings to the government, thus creating a more level playing field for private sector business. This money will be used to finance increased spending on education and other social programs. Some critics say that the amount that SOEs must pay to the government will still be too small.
- The government will expand its experimentation with property taxation in order to encourage more economically sensible use of property. This is a controversial issue.
- Rural migrants will have greater opportunity to officially transfer their residency to cities, thus enabling them to obtain social services from local governments where they already reside.
In a statement, the government said that “deepening reform of income distribution is a very huge and complicated project, and it can’t be done in one step.” The steps announced represent an attempt to gradually shift growth away from investments undertaken by state-run companies and toward consumer spending. It also represents an effort to stem the widening income gap that, officials fear, could become the source of increased unrest.