China’s strong economic growth belies signs of weakness

On the surface, China's economy is humming along smoothly. It's the numbers behind the numbers that point to mounting challenges for the world's other economic superpower.

The Chinese government on Monday reported that the economy grew 6.7 per cent in the three months that ended in June compared with a year ago. That is pretty close to the rate China has reported quarter after quarter over the past 2½ years. The pace puts it comfortably within its target of achieving growth of around 6.5 per cent for the full year.

There will be trade challenges in the second half, the statistics authority said.

There will be trade challenges in the second half, the statistics authority said.

Those figures belie warning signs elsewhere. More detailed data show weakening investment in infrastructure and a slowdown in spending by China's usually ebullient consumers. Private Chinese businesses complain that government efforts to tame debt have made it hard for them to get money. A tiny but growing number of Chinese companies have defaulted on their debt. The currency has lost some of its value. Chinese stocks are in bear market territory.

It may just get tougher from here. The United States has started a trade war with China, and by this autumn it could widen the conflict by hitting another $US200 billion in Chinese goods with tariffs. While the Chinese have made progress diversifying their economy, the country still relies heavily on making and exporting toys, clothes, car parts and other goods to the United States and elsewhere.

China has options, but they have drawbacks. China could put more money into its banking system, which would juice growth. It could also ramp up spending in big projects like highways and airports. But both could undermine its efforts to break the country's addiction to borrowing.

Roads to prosperity

China's spending on bullet trains, highways and bridges has long driven its growth. That spending has kept steel and concrete factories in business and helped provide pay cheques to millions of workers. Now that investment has begun to falter.

China's annual infrastructure investment growth, which has consistently risen about 20 per cent in recent years, has slowed to less than half that rate this year. That slowdown has coincided with renewed pledges by Beijing to tackle China's debt problems, which stem from big spending by local governments and big Chinese state-controlled companies.

Signs of a deliberate slowdown were apparent during the second quarter. In China's sparsely populated Xinjiang region in the far west, local and regional agencies halted or ordered immediate reviews of the viability of many projects.

Several other inland provinces, plus coastal Shandong province, ordered halts or financial reviews of infrastructure projects about the same time. Particularly targeted for suspension have been projects that were being built by public-private partnerships.

Counting on consumers

China has successfully turned to its consumers to pick up the slack during slow times. Retail sales have boomed as an increasingly middle-class China buys more cars, smartphones, appliances, dairy products and a wide variety of other goods.

That boom may be easing. Retail sales growth slowed earlier in the quarter, official data showed, though it picked up a bit in June.

The slowdown may have a number of underlying reasons, like a decline in consumer lending for cars and a flattening of the market for smartphones. But China's bean counters may also be missing some vibrant activity. They may not, for example, capture the full scope of online shopping.

What the numbers show — and what they don't

In the end, it isn't clear whether the economic growth figure tells us much about the state of the Chinese economy. In fact, research shows that China has been both overestimating and underestimating growth for years.

Research shows that China has been both overestimating and underestimating growth for years.

One new analysis suggests that the Chinese economy grew even faster last year than official data showed. The analysis, by professors at Cambridge University in Britain and two Dutch universities, was based on sales and gross margin data from 150 of China's biggest companies.

How is it possible that China understated its own growth last year? The analysis also indicates that China was over-reporting growth in 2015 and 2016, when China suffered a stock market crash and a disorderly currency devaluation. So some of the growth last year may have been catch-up — and that has now faded.

The New York Times

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