Analysis: China upturn underscores need to rebalance economy

BEIJING Sun Jan 20, 2013 4:28pm EST

A construction site of a residential compound is reflected on the glass facades of a office building in Taiyuan, Shanxi province, January 15, 2013. REUTERS/Stringer

A construction site of a residential compound is reflected on the glass facades of a office building in Taiyuan, Shanxi province, January 15, 2013.

Credit: Reuters/Stringer

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BEIJING (Reuters) - China's recovery from its longest slowdown in growth since the global financial crisis is being driven by the two forces posing the biggest risks to the economy's increasingly urgent need to rebalance - investment and property.

The central government wants to raise consumption's share in the economy as the cornerstone effort to close one of the world's widest gaps between rich and poor and quell the discontent among those Chinese who feel they missed out on the country's blistering expansion of the past three decades.

The economy picked up in the fourth quarter as a spurt of infrastructure spending orchestrated by Beijing broke seven straight quarters of a slowdown. Consumption's contribution to growth fell in the fourth quarter for the third straight quarter even though retail sales were rising in each of the last three months.

Short-term policies to drive the recovery may well explain that because the biggest improvements were real estate-related, casting doubt on whether Xi Jinping and Li Keqiang - President- and Premier-in-waiting, respectively - can really rebalance the economy and lever its giant size to deliver widespread wealth.

"While the recent turn in the economy is real, the true test for China's new leadership is not whether they can manage the cycle, but whether they can put longer-term growth on a stronger footing," Janet Zhang, an analyst at consultancy, GK Dragonomics, wrote in a note to clients.

Dependence on investment spending - now at around 50 percent of GDP - for three decades of development has created huge industrial overcapacity in China, eroding economic efficiency despite some of the world's lowest labor costs and requiring increasing amounts of capital to deliver diminishing returns.

That worries investors and makes the International Monetary Fund fret about the risk of a capacity glut that could have global consequences.

Analysis by HSBC shows investment growth is contributing more to the economy than at any time since 2009 - the year in which China injected the bulk of a 4 trillion yuan ($640 billion) stimulus to counter the impact of the global financial crisis.

Economists at UBS noted meanwhile that growth in December's retail sales may have been stronger-than-expected at an eight-month high of 15.2 percent year-on-year, but the pickup was on household goods, furniture and construction materials tied to rising property transactions.

It serves to emphasize how hard it is for Beijing to shift the economy's underlying growth drivers.

Consumption might have been the biggest single contributor to 2012's full-year GDP growth of 7.8 percent, but its 51.8 percent share remains far below the 70-80 percent typical in developed rich economies.


Spreading the benefits of China's ascent to its position as a global economic powerhouse is seen as the best way of quelling the risk of revolt. Even a newly recalibrated official index last week indicated the wealth gap was so wide that serious social dissatisfaction may be brewing.

Chinese officials are likely to be agonizing anew over the headstrong property market in the wake of GDP data that showed fourth-quarter growth rebounding to a stronger-than-expected 7.9 percent alongside a pronounced upswing in real estate sales, housing starts, investment and home prices.

Real estate is a hot-button topic for the government because many Chinese complain that prices are out of their reach.

House prices in their own central Beijing backyard are zooming towards record highs, despite three years of steady policy action to rein-in rises and stifle speculation.

Apartments in the Champion Court housing estate that is a 15-minute walk from the headquarters of the People's Bank of China are selling at all-time-high prices of between 80,000-100,000 yuan ($12,900-$16,100) per square meter.

Prices have jumped 10 percent in the past year, data from China's largest online real estate firm Soufun Holdings (SFUN.N) showed, as Champion Court's proximity to China's financial center draw buyers who think they can benefit from its location.

Official data shows monthly rises in the country's top 70 cities for five of the last six months, the latest in December.

"To be honest, I think prices are unthinkable," said a property agent surnamed Jin who declined to give his full name.

Jin's firm specializes in property in Beijing's financial district and around 60 percent of the homes it sells are paid for immediately in cash, he said.

Champion Court's eye-watering prices belie a dreary exterior, suggesting Beijing faces a long slog in curbing property inflation despite limits on home purchases and hefty down payment rules.

An 80-square-metre (860 sq ft), one-bedroom Champion Court flat was on the market last week for 7.2 million yuan ($1.16 million) when Reuters visited. The bathroom had a rusty tub and a hole in the wall.

Built in 2004, the price of Champion Court apartments - which give buyers 61 years of ownership rights - have galloped 10-fold since, said Zeng, a property agent who also declined to give her full name.


Contrary to urban Chinese legend that blames coal mine bosses for driving up house prices with their newly-minted wealth, Zeng, whose office is near Champion Court, said owners are bankers or civil servants working in the financial district.

"It's supposed to be the lull season in the property market now but we can't feel the lull this year," she said, adding that her firm sold a 4.75 million yuan flat in 3-1/2 hours last week.

And even with Champion Court's record prices that are on par with those in France and Japan, it is not the priciest estate in town. Further west, giant luxury apartments at the Diaoyutai No. 7 compound cost as much as 160,298 yuan per square meter.

China's average annual urban disposable income in 2012 was 24,565 yuan. Home prices meanwhile averaged 20,700 yuan per square meter in Beijing last year.

Accelerating property inflation could put the pressure on Beijing to tighten monetary policy before the year is up, a move that carries risks given China is only just recovering from its worst full-year of growth in 2012 in 13 years.

The upside for now is that the recovery is taking hold and that, by common consensus, China has successfully avoided a so-called economic hard landing that many analysts said would have rippled across the global economy.

Neither can it be ignored that consumption was the biggest component of the economy in 2012, nor, as GK Dragonomics' Zhang observes, that household income growth outpaced GDP for only the third time in the past decade.

The downside is that recovery so far is underpinned by infrastructure projects and the property market. And that remains a concern for many analysts and investors.

"China faces the increasingly urgent task of rebalancing its economy away from investment and towards consumption," Andrew Colquhoun, senior director for sovereigns at ratings agency, Fitch, wrote in a note to clients.

"The data show limited progress so far."

(Editing by Nick Edwards and Neil Fullick)

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Comments (6)
WJL wrote:
You cannot rebalance the economy to domestic consumption if the people do not have adequate income. The initial phase always has to be capital investment to raise productivity and incomes.

The chinese government is well aware of the above facts. As per capita income is still low compared with other countries, the need for capital investment still remains. Retail sales have been growing steadily at about 15% over the last decade and consumption now contributes over 50% of the GDP. Imports have rocketed and benefited many trading partners.

It is a good example of how to manage an emerging nation economy. Well done!

Jan 20, 2013 8:05pm EST  --  Report as abuse
ncshu2 wrote:
The economic problems of China, particularly mentioned in the article to be rebalanced–investment and property, are deeply entrenched in the nation’s political system. Though Deng’s economic reforms has opened up China to the outside capitalist world for about 30 years, deep in the root, China is still a totalitarian country, where the government controls every fundamental of the society.

Pertaining to the seemingly forever overheating investment and property market is the direct executive control of the nation’s financial sector. Although the four national banks are listed in the security markets, strictly speaking they are not even near commercial banks yet, as the government does not only have a say where these so-called commercial banks invest but also decide the interest rates. One may argue in US the federal funds rate is targeted by FED, in China the deposit and lending rate are determined by its central bank–The People’s Bank of China, what’s the difference? The difference is huge! FED influences the interest rate by changing the money supply in the market, then let the market decide the rate. In China, the change of interest rates are declared by direct executive orders from its central bank. Thus commonly these interest rates are miles apart from those would-be rates decided by the market. To lower the cost of investment by the government and large or state-owned enterprises, the national deposit rate are deliberately set below the CPI most of the time. That’s understandable in a totalitarian political system where large or state-owned enterprises could always deny a proper share of the ordinary majority in deciding the national social economic policies. The deliberate low deposit interest rate set by the government impels many ordinary Chinese would rather put their money in other form of investment including the property market. That’s the demand side of the market. The low cost of investment resulted from the government policy have also helped the developers to finance their property projects.

One of the most conspicuous examples to illustrate the disastrous outcome of the complete governmental control of the country’s financial sector regarding to where the banks invest, is the high-speed railway project as a part of government stimulus plan to boost the economy after the world wide financial crisis in 2008. After many years of the project, it has not only constructed a system of quite vacant glistering high-speed trains most Chinese migrant works could not afford, but also amass an astronomical debt of 2.6 trillion yuan ($416 billion) for the Ministry of Railway alone. Also to the point, the minister of the Railway Ministry in charge of the project and his major subordinates have been arrested for the official corruption. Without the governmental control of the country’s financial sector, this kind of stimulus projects could not even be started at the first place due to the lack of means to finance. No commercial banks would support such grandiose project that the loan payback chance were so remote.

Without a deeper political reform, the chance to tackle these economic problems is quite slim.

Jan 21, 2013 5:29am EST  --  Report as abuse
joe10082 wrote:
China’s amazing economic growth over the course of the last decade has come at the expense of the health and happiness of a majority of the Chinese people. Underpaid; abused; and uncared for as they are. The Chinese leaders have knowingly taken this action thinking there would be no or little internal resistance to what they are doing. That was a major mistake on their part because the Chinese people number in the billions and hundreds of thousands will risk death itself rather than being brutally punished any longer by their uncivilized, self absorbed leadership.

Jan 21, 2013 7:43am EST  --  Report as abuse
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