One of China’s top economists says that hopes for a stabilisation in Chinese GDP growth are unfounded given an intractable slowdown in fixed-asset investment.
Many economists have recently become sanguine about China’s near-term growth prospects, after the country posted its first rebound in annual GDP expansion since the turn of the decade, with growth of 6.9% in 2017.
Yu Yongding, a former member of the Chinese central bank’s Monetary Policy Committee, says any such optimism is likely misplaced, however, given China’s ongoing inability to effectively implement structural changes, and the economy’s continued dependence upon fixed-asset investment.
In an article written for Project Syndicate, Yu notes that fixed-asset investment has long been China’s primary driver of growth, and currently accounts for in excess of 50% of GDP.
China’s fixed-investment investment growth has steadily declined since late 2013, however, hitting its lowest levels in decades by the second half of 2017.
“In the first three quarters of 2017, fixed-asset investment grew at an average rate of just 2.19% year on year,” writes Yu.
“In the third quarter, investment growth was actually negative, at -1.1%.”
Yu breaks down China’s fixed-asset investment into the three main categories of manufacturing, infrastructure and real estate.
While manufacturing investment accounts for the biggest share at around 30%, a steady decline since 2012 has been a key factor behind declining investment growth, with a no rebound in sight unless China manages to pull off a major technological or institutional innovation.
Real estate investment is unlikely to rebound in the near-term given Beijing’s concerns about local asset bubbles and determination to contain housing prices.
Infrastructure investment has since its share of the total rise since 2012, in tandem with the decline in manufacturing investment. According to Yu it’s already hit such high levels, that any further increases would lead to a misallocation of resources.
Even if desirable from an efficiency perspective, further expanding infrastructure investment would prove difficult at present given the Chinese government efforts to tight financial regulation and the debt-raising proclivities of local authorities.
While a shift away from dependence upon fixed-asset investment might be a positive for the Chinese economy in structural terms, Yu does not expect growth in either household consumption or net exports to offset declining investment, particularly given the Trump administration’s increasingly aggressive trade stance.
For this reason, Yu concludes that “optimism about China’s economic growth in 2018 is not warranted,” although he sees a silver lining in Beijing’s determination to push through with its reform agenda.
“The Chinese government’s ongoing efforts to cultivate innovation and implement structural reforms are likely to produce major returns in the long term,” he writes.