China’s First Half 2017 Economic Review

China’s economic year 2017 is half over (or half remaining, depending on whether you are one of those beizi-full or beizi-empty people) and I’d like to share a bit of analysis with you on the data so far.

If you believe all the major statistics (GDP, trade, fixed-asset investment, retail spending, etc.) about China’s first half 2017 economic performance, there’s only one reasonable conclusion: Everything is awesome!

To wit, China continues to perform as expected with no hard-landing of the economy, Yay!  But  of course, there’s a lot more to the story than that, China is complicated, so we should look beyond the ‘big data’ to see what we can really see.

First, just for reference and brief review, let’s get the usual suspects out of the way (all of these figures  are 1H 2017 unless otherwise noted):

  • GDP was up 6.9%, slightly above forecast (more on this below)
  • Retail sales were up 10.4 percent, or 17.24 trillion yuan, faster than the rate of GDP growth but really slowing versus a few years ago. Have Chinese consumers shopped ’til they dropped? Maybe in the malls, but online spending increased 33.4 percent year-on-year, to 3.1 trillion yuan (US$457 billion), about 2/3rds of that physical goods and the other third services. That may sound like a lot, but it’s only 13.8 percent of the total retail sales of physical goods, whcih actually highlights that eCommerce still has huge growth potential.
  • Exports were up 15 percent, and imports up 25.7 percent,  or 19.6 percent in terms of total trade, which is, frankly speaking, really awesome (no joke intended this time). China is now without doubt the world’s biggest trading nation and will remain so for quite some time. It also has a trade surplus of 1.28 trillion yuan (~US$188 billion) during this period, alleviating pressure on decreasing foreign reserves. The Belt and Road Initiative seems to be starting to show some positive effects for China, with trade (i.e. aggregate imports and exports) increasing to Russia, Pakistan, Poland, and Kazakhstan by 33.1 percent, 14.5 percent, 24.6 percent, and 46.8 percent respectively, according to the National Bureau of Statistics.
  • Fixed-asset investment was up 8.6, percent and private sector investment up 7.2 percent, nothing too surprising here, but slowing from previous years.
  • Per capita disposable income rose 8.8 percent (or 7.5 percent less inflation) to 12,832 yuan a person.

Now I did say, iif you believe.  If you don’t believe the numbers, all I can say is you are right to be skeptical since, after all, provinces such as Liaoning admitted earlier this year to inflating results from at least 2011 to 2014, and the man who was in charge of China’s economic data for many years, Wang Baoan (whose name literally means ‘preservation of peace’ or, more colloquially, security guard) was investigated in 2016 and this year convicted and given a life sentence for corruption.

So skepticism is warranted, and we’ve known this for years. My first book way back in 2008 pointed out the perils of relying too much on China’s official numbers due to the many distortions including time lags, misreporting at the local level, and waste construction (building of ghost cities, for example).

I know we said we weren’t going to dwell on the headline GDP growth but let’s take the data at face value,, does it mean anything?

Going on the basis of China’s 1H GDP growth rate of 6.9 percent, GDP appears to have bottomed out in 2016 at 6.7 percent. You may remember all the hand-wringing  in global media about that being a 26 year low.  So the 6.9 percent increase  so far in 2017 represents a slight uptick and cause for minor celebration.

Still, I would not expect for much higher for the rest of 2017 and onward for two reasons: As long as China maintains growth above 6.5 percent, it will achieve the Centenary Goal of doubling GDP (from 2010 levels) by the time of the 100th anniversary of the founding of the Communist Party of China in 2021, as well as meet its 13th Five-Year Plan’s target of 6,5 percent annual growth. Second, China’s own media and ‘authoritative insiders’ are telling us to expect an L-shaped recovery, and that seems to be what we are getting.

Still, there are those of you out there who believe that China’s real GDP growth is far lower. Various estimates range from ‘barely breathing’ to ‘sub-optimal’  but is China a giant Potemkin Village? My own travels throughout the country during the entire first half tells me otherwise. I’ve visited Changchun, Shenyang, Dalian, Xi’an, Chongqing, Chengdu, Changsha, Zhuhai, Hangzhou, and a number of other cities besides Shanghai where I reside and in all places I’ve seen economic growth and activity, both in comparison to when I last visited those places as well as relative to the big first tier cities. China, from what I can see (and the statistics support this), is growing much faster in its second-, third-, and fourth-tier cities.

OK, let’s move on. Here are some of the really interesting things I’ve noted out of the official reports.

Job creation:

China’s job growth is, in a word, blazing. In a society as big as China’s you need a lot of new jobs, more than 7 million a year at least to absorb new higher-education graduates alone. If you include all the rural people who are urbanizing, the country figures it needs about 11 million jobs a year. So far in 1H 2017, China created 7.35 million, a fair number more than half, but the first half of the year is generally better because that’s when all the companies get their funding as bank lending quotas reset.

And don’t get me started on the urban unemployment rate, it’s never really gone above 5 percent ever and there’s so many problems with how this data is tracked and reported I wouldn’t know how to explain it in a mere blog article, but just for the sake of completeness, this 1H 2017 urban unemployment figure was also below 5 percent both in terms of the national rate and in the 31 major cities survey.

Where exactly are all these jobs coming from?  There are a large number of new service jobs being created in cities as urbanization continue but the main job creator in China is, in a word, entrepreneurship. As I have traveled the country, I’ve stopped in many a coworking space and routinely found them to be full of entrepreneurs and startup teams. This is part of the policy catch phrases 创新创业 (innovation and entrepreneurship) or 双创 (double innovation) for short. This is great for the country because it does indeed stimulate job creation, as most jobs are created by entrepreneurship whereas China’s big state-owned enterprises are shedding jobs.

And, as each student graduates, their job placement can be either 1) a traditional job, 2) back into school for more education, or 3) startups / self-employed. No wonder there are so many coworking spaces / incubators / creative hubs popping up all across China, especially around university campuses. On a recent trip to Dongbei (the northeastern part of China which officially includes Liaoning, Jilin, Heilongjiang, and parts of Inner Mongolia, there were dozens in most big cities, such as Shenyang with 70 and Dalian with 30 spaces. That doesn’t include incubators, of which there are more.

I would be remiss if I did not mention that, of course,  many of these ‘jobs’ don’t exactly pay well, being startups after all, and some pay nothing at all,  such as perpetual internships. And they are dependent long-term on the startup being at least modestly successful. But even so, it seems to be a good effect so far and it is safe to say that millions of jobs have been created across China in the past several years thanks to this entrepreneurial policy.

 

Overseas Investment:

This really deserves its own post (and I may do just that in a while) but overseas direct investment — Chinese companies investing overseas — was down dramatically in the 1H 2017, by 45.8 percent, to US$48.2 billion. Now, 2016 was a huge year for ODI, China’s biggest year ever in fact. So a slowdown is somewhat expected, but there were clearly other reasons behind the fall.

First, a large number of overseas deals were dogged by controversy in late 2016 and the 1H 2017, as the fear of Chinese investment started to echo to 1980s fear against Japan Inc. You may remember that then it was the Japanese economy that was thought unstoppable and Japanese companies predatory in their acquisitions.

Like Icarus flying too close to the sun, Chinese companies in their hubris thought no company too expensive, no deal too big, and in 2016 invested a record 1.1 trillion yuan (US$,166 billion),  up 44.1 percent over 2015. One company, ChemChina, even dropped US$43 billion on a single acquisition, Swiss agro-chem giant Syngenta.  It also bought Kuka, a German industrial robotics manufacturer, and property developer Wanda bought more movie theaters and land abroad, Midea bought the appliance division of GE, China’s insurers bought billions in hotels and other revenue-generating properties in major cities around the around, and so on. It was a very big year which saw Chinese enterprises invest in 7,961 companies overseas in 164 countries.  Big investors included HNA Group, Dalian Wanda, and Anbang Insurance.

These deals started to attract significant attention from both overseas regulators  such as the Committee of Foreign Investment in the United States which worried that Chinese companies were trying to acquire key military  and electronics technologies on behalf of the government’s 13FYP and Made in China 2025 plans, didn’t allow reciprocal investment in its own market, and was funding the acquisitions through government-owned banks or investment funds acting as proxies for state enterprises.

Other countries such  as Australia looked more closely at deals, with Australia in particular rejecting a number of investments, cracking down on Chinese real estate investment, and getting embroiled in a scandal about Chinese political donations. The UK after Brexit was cautious about rejecting any deals but made it clear with the Hinkley  Point C nuclear power station review after the Brexit vote that it was keeping an eye on Chinese investments. Meanwhile the EU was mostly powerless to block deals except on the strictest national security grounds.

Second, China’s own government bodies, including the People’s Bank of China and State  Administration of Foreign Exchange, and the Ministry of Commerce among others, started to oppose these deals for a number of reasons. The magnitude of the outflow of foreign currency was becoming alarming, especially in 2H 2015 and early 2016 when outflows were especially pronounced.  PBOC and SAFE were generally opposed to these high levels of ODI and there was also a fear that such deals were merely being done to shift assets overseas pending a . MOFCOM even went so far as to start describing the irrationality of the deals, such as appliance company Suning buying a soccer club, companies like Anbang apparently over-paying for assets like the Waldorf Astoria, and other ‘prestige’ investments instead of practical technologies which the government wanted more of.

Conclusions:

Going back to the original theme, it is clear that none of the above is truly cause for alarm though by most measures China’s economy is doing less well than it did before. Or the more skeptical might say, less worse.

For the rest of the year, I am betting on more of the same. There are some big challenges globally with the US-China relationship being a very big question mark at the moment, but I don’t see any of the big doomsday scenarios (property crash, debt crisis) happening in China this year. With the 19th National Congress of the Communist Party of China coming up in the autumn, no chances will be taken.

Notes:

CNY/USD exchange rate used in calculation is 6.8

Want to read more ideas  and analysis of China’s economy? Check out my new book on the subject, called The Man, the Plan, the Dreamthe first book in the China 4.0 series, available now on Kindle ebooks.

Leave a Reply

Your email address will not be published. Required fields are marked *