China Economy Forum

[cirr]

Recalculate China’s GDP before rebalancing

Nov 28, 2013 12:03pm by guest writer

By Ken Peng of Citi Private Bank

China must rebalance! Yes, everyone from President Barack Obama to your average Beijing taxi driver knows that. Around 48 per cent of China’s GDP is investment, just 36 per cent is household consumption, with government spending a bloated 13 per cent and net exports, 2 per cent. Whether through timely and painful reforms now or delayed reforms and disaster later, investment growth is expected to falter and consumption to be unable to pick up the slack.

But what if these basic assumptions are wrong?

It is increasingly accepted that China’s consumption is underestimated, while its investment is overestimated. Two studies, among others, have shed light on the subject. One is on unreported ‘grey’ income by Professor Wang Xiaolu of the National Economic Research Institute; the other is on consumption underestimation by Professors Zhang Jun of Fudan University and Zhu Tian of the China-Europe Business School. Many have heard of these studies, but most believe that the difference is insignificant.

By combining the results of the two studies, however, my conclusions show very significant changes to China’s GDP composition. The corrections would raise household consumption by 11 per cent of GDP, while reducing the shares of investment and government spending by 8 per cent and 3 per cent of GDP, respectively.

Even that only brings consumption from 36 per cent to 47 per cent, still a long way away from desirable. But the implication is profound: it would mean that China need not be so aggressive in slowing investment and that it has less scope than previously believed to stimulate consumption. Correctly identifying the starting point of rebalancing would go a long way to determining just how fast the process needs to take place.

The quality of China’s statistics is under constant challenge. Three big problems are explored here.

First, household income is underestimated due to massive unreported ‘grey income’, particularly at the high end. By extension, ‘grey consumption’ is also left out. Wang finds that grey income amounted to Rmb6.2tn ($1tn) in 2011. He also estimates that GDP is underestimated by Rmb3.7tn. This implies that government and enterprise incomes are overestimated by Rmb2.5tn, which would curb their spending and investment. In other words, the Rmb3.7tn of additional GDP should be entirely classified as consumption.

Second, the value of housing use is underestimated. The GDP data put the value added of both owner- and tenant-occupied housing at an average of just Rmb1,868 a year or Rmb156 a month per household (both rural and urban). If we assume Rmb500 a month, which is still on the low end, then the extra rental value would be about Rmb1.7tn, which would be additional service consumption within GDP. By contrast, US GDP data assumes about $1,200 a month per household.

Third, a large amount of household consumption is disguised as business costs, government spending and investment. Vehicle use, gifts, vacations, meals, even groceries can be counted as business costs, so long as tax receipts can be procured. This is hard to quantify, but the Wang study provided a clue. As mentioned above, Rmb2.5tn is subtracted from government and enterprise incomes, which can be split roughly evenly according to their respective shares of national income. Assuming that the government saves 30 per cent as reported, then government spending (G) would be reduced by Rmb856bn. Since gross capital formation (I) amounted to 128 per cent of enterprise disposable incomes, the Rmb1.3tn reduced income would mean Rmb1.6tn reduction in gross capital formation. The sum of reductions in G and I is about Rmb2.5tn, matching what is implied in Wang’s study.


Source: Citi | Click to enlarge

The other side of this correction is that China saves less than officially reported. China’s households are often blamed for over-saving and the official data puts 2011 household savings rate at an outlandish 40.9 per cent of disposable income. But after my adjustments, that ratio is 28.8 per cent – still not too shabby. Put in government and enterprise savings, and the adjusted data show a national savings rate of 42.3 per cent, considerably lower than the official 50.6 per cent. This is, undoubtedly, still a high rate but it is in agreement with our previous calculation that investment was overstated by 8 per cent of GDP.

2011 Savings Rate Reported Adjusted
National 50.6% 42.3%
Households 40.9% 28.8%
So what do all these numbers mean? To put it simply, China still has time to rebalance. Reforms should focus on improving equity and efficiency, rather than slowing down GDP or investment growth. The above findings can help to answer several mysteries.

• How high can investment growth sustain while rebalancing? If the aim is to make household consumption take up half of GDP by 2020, the official data would simply make it impossible because it would require faster consumption growth and a sharp decline in investment growth, which simply cannot take place together. After adjustments, however, consumption needs to grow 11 per cent annually, a tad slower than the 12.7 per cent 2012 pace, while investment can still grow at 9.3 per cent annually, not far below the 10.7 per cent in 2012.
• Where has the borrowed money gone? Since the 2008 financial crisis, China’s debt-to-GDP ratio has ballooned, leaving many analysts wondering what the borrowed money had bought. A lot of that debt paid for disguised consumption (8 per cent of GDP, or 20 per cent of capital formation). But if this is consumption debt, then it should be repaid by those who consumed, which needs to be addressed by government and fiscal reform.
• How can China grow with constrained credit? China now takes 6.7 units of credit to create 1 unit of investment, which is about double the global average, and of China’s own pre-2008 experience. This indicates deepening problems of corruption and inefficiency. But at the same time, it implies that a lot of funding did not go into real investment projects in recent years. So, if corruption and efficiency can improve with recent reform efforts, then it would take less credit per unit of GDP.

This is not a call for less reform. Rather, it is to show that improving fairness, rule of law and distribution are the top priorities. Although overcapacity clearly exists in some industries, China’s top issue is to bring about efficient investment rather than to rein in too much investment. Of course, the inept statistical machine also needs to be fixed. Another possible consequence of better distribution may actually be less illicit activity and more subdued consumption growth.

But the key point is this: with a less severe degree of imbalance, China’s future growth does not necessarily have to falter. The IMF’s projection of average 6 per cent real GDP growth from now to 2030 is not only possible, but likely.

Ken Peng is Asia strategist with Citi Private Bank, and previously served as China economist for Citi and BNP Paribas

Guest post: recalculate China’s GDP before rebalancing | beyondbrics

 

[Kolaps]

^
Mainland infrastructure investment is too great, no wonder if everyone say it was too big.

Just look all the skyscrapers in the mainland cities. Then 50+ metro projects, thousands kilometers of HSR line, tens of thousands kilometers of highway, tens of nuclear power plants, hundreds of bridges, etc, all at the same time. Just think about the money spend.

 

[cirr]

^
Mainland infrastructure investment is too great, no wonder if everyone say it was too big.

Just look all the skyscrapers in the mainland cities. Then 50+ metro projects, thousands kilometers of HSR line, tens of thousands kilometers of highway, tens of nuclear power plants, hundreds of bridges, etc, all at the same time. Just think about the money spend.

If you look at the investment density and compare it with that of European countries，the building of infrastructure is far far from over。

Every major Mainland province must do a France or Germany in the next 20-30 year。

 

[JayAtl]

China's cash crunch threatens Shadow Banking shock
A blast of money from China’s central bank has failed to stem a deepening cash crunch in the country as liquidity dries up and struggling lenders hoard funds.

One-week borrowing costs in Shanghai jumped 119 basis points to 8.643pc, the highest since the cash crisis in June that sent minor tremors through the financial system. Though less volatile, the crucial 3-month ‘Shibor’ rate watched for signs of trouble in the shadow banking sector has climbed 80 points to 5.52pc since the beginning of the month.

Fitch Ratings says the biggest risk may lie in China’s wealth management products, a “hidden second balance sheet” of the banks alone worth $2 trillion.

Half of all liabilities have to be rolled over every three months and a further 25pc every six months. There are reports that some are already under water.

If rates remain at current levels for long, weaker funds could be caught in a squeeze akin to the shock that hit Northern Rock and Lehman Brothers in the West when the capital markets seized up
China's cash crunch threatens Shadow Banking shock - Telegraph

 

[cirr]

China's annual inflation is a low 2.5-3.0%，in stark contrast to the world's largest democracy where prices have seen rises of 10% plus for god knows how many years。

If it were not for the central government‘s determination to restructure and rebalance the economy，the sky high（over 20%，compared to India's low 3.5%）bank reserve ratio would have been lowered to rectify the so-called cash crunch。

Interest rates are also higher than inflation rate，providing room for looser monetary policy should the economic situation demand。

But hey，on balance the economy is doing well，so the monetary authority is just sitting pretty。

 

[Nan Yang]

Not to mention China is raking in 20 billion every month in trade surplus.

China's annual inflation is a low 2.5-3.0%，in stark contrast to the world's largest democracy where prices have seen rises of 10% plus for god knows how many years。

If it were not for the central government‘s determination to restructure and rebalance the economy，the sky high（over 20%，compared to India's low 3.5%）bank reserve ratio would have been lowered to rectify the so-called cash crunch。

Interest rates are also higher than inflation rate，providing room for looser monetary policy should the economic situation demand。

But hey，on balance the economy is doing well，so the monetary authority is just sitting pretty。

I doubt JayAtl even understands what he posted nor your reply.

 

[killim]

Hello everyone

I am a Chinese businessman, plans in January 2014 to Karachi, Lahore, Islamabad, Peshawar and other civilian goods to do business trips, is there no one to do the translation?
Chinese, Korean, Japanese can be.

Examine the contents:
Exports from Pakistan: marble, agricultural products, handbags, leather
Imported into Pakistan: children's clothing, shoes, household appliances, pharmaceuticals, medical equipment and so on.

Study period: January 28 - February 28


If anyone can help, please send mail to killim@163.com

Thank you for the help.

Colin

 

[JayAtl]

Report Faults Increase in China’s Local Government Debt

SHANGHAI — China’s local government debt has reached an “alarming level” and poses a significant risk to the country’s fast-growing economy, according to a Chinese government think tank.


Two years after analysts began raising concerns about municipal borrowing, Chinese local governments appear to have piled up even more debt, about $3.3 trillion by the end of 2012, perhaps double the level in 2010.

The report, released this week by the Chinese Academy of Social Sciences, is the latest indication that China may be investing too aggressively in property and infrastructure projects, potentially setting the stage for a wave of loan defaults and a severe economic downturn.

While many economists expect China’s economy to grow 7 percent in 2014, there are mounting concerns about the sustainability of the country’s economic engine.

In Beijing, the authorities are pushing to restructure the economy to make it more market oriented, in the hopes of tackling inefficiencies and potentially huge hidden liabilities.

In recent years, China’s growth has been fueled by heavy investment in infrastructure, everything from new highways and railways to ports, subways and shopping malls.

Growth weakened at the outset of the global financial crisis. But in 2009, Beijing backed a huge economic stimulus program that accelerated growth and pushed up property prices.

Now, analysts say the investment binge may have been excessive.

“What bothers me is not the current level of debt but the pace of the increase,” says Shen Minggao, a Hong Kong based economist at Citigroup Global Markets. “But if the pace of growth is slowed or capped, that will have a direct impact on infrastructure growth.”

Infrastructure spending, Mr Shen says, has been one of the crucial pillars of China’s growth engine over the last decade. If investment slows, it could be difficult and painful.

Earlier this year, the authorities in Beijing indicated that managing the risks of local government debt would be a high priority in the coming years. Some officials proposed Holding local authorities more accountable for excessive debt build up; other bureaucrats hinted the central government may be forced to step in and help bail out some localities.

One of the unknowns is how much debt exists. There have been a wide range of figures tallied, though all of them suggest trillions of dollars of debt just on the part of local governments.

Analysts say much of the debt is masked by “shadow banking” activities. Such activities allow large amounts of lending to take place off the books, through trust companies and so-called local government financing vehicles.


http://www.nytimes.com/2013/12/25/b...n-chinas-local-government-debt.html?ref=world

 

[cirr]

Building started today on a new 519km HSR linking Chengdu，capital city of Sichuan Province，with Guiyang，capital of guizhou province，in west and southwest China。

When completed in 2019，the 74.6 billion yuan investment will cut Chengdu-Hong Kong travel time from some 30 hours to a little over 7 hours。

Started on the same day is the 737km double track connecting Chengdu and Kunming，capital of Yunnan province，with completion scheduled for 2020.

 

[cirr]

Over 10 HSRs and quasi HSRs to open tomorrow on 28.12.2013.

Don't know why the openings of railways have to clump together

 

[Kolaps]

If you look at the investment density and compare it with that of European countries，the building of infrastructure is far far from over。

Every major Mainland province must do a France or Germany in the next 20-30 year。

I definitely agree with you.

A lot of homework need to be done. A lot!

 

[Assault Rifle]

China stock market disappoints on double cash crunch.
By Amanda WANG (AFP) – 27 minutes ago

Shanghai — A cash shortage among banks made the Chinese stock market one of the world's worst performing this year, showing how tens of millions of small investors remain at the mercy of government policy.

In June and again in December, a liquidity squeeze sparked worries over China's broader economy and hit the stock market -- but the funding crunches were widely seen as engineered by authorities keen to impose tighter financial discipline over banks.

Combined with a tepid rebound in the economy -- the world's second largest -- and worries over a resumption of new share offers flooding the market, Shanghai's benchmark stock index had dropped 6.90 percent for the year by early afternoon on Tuesday, the year's final trading day.

"Instability in the financial system and expectations that authorities would maintain a tight balance in its monetary policy led to some volatility in the market," said BOC International analyst Shen Jun.

In comparison, Tokyo's Nikkei 225 index soared 56.7 percent over the year, in New York the broad-based S&P 500 had surged 29.1 percent by Monday -- having tapped several record highs -- while the CAC 40 in Paris gained 17.4 percent despite the French economy's woes.

Even the Hang Seng Index in Hong Kong, which is strongly exposed to the Chinese economy, rounded out the year up 2.87 percent.

China's central bank has shown reluctance to inject extra liquidity into the interbank market as it fends off potential risks to the financial system and clamps down on shadow banking that resulted in excessive credit, analysts said.

The moves have caused spikes in the rates at which banks borrow from each other, with the effects spilling over to the stock market.

On June 24 the Shanghai Composite Index tumbled 5.3 percent, the biggest single-day decline since August 2009, after the central People?s Bank of China (PBOC) initially shunned injecting liquidity before eventually relenting.

Similar worries also plagued the market in December, sending the Shanghai index down 6.9 percent over a nine-day losing streak, until the PBOC intervened to add funds.

The central bank said Tuesday it would maintain an "appropriate" level of liquidity while repeating its embrace of a "prudent" monetary policy, according to a statement on its fourth-quarter meeting.

"The stock market has always been sensitive to each and every move of policymakers," said Central China Securities analyst Zhang Gang.

Similarly, China's authorities hold the power to decide which firms can launch initial public offerings (IPOs) and when they go to market, an example of the control the state retains over many parts of the economy.

Window-dressing reforms

China?s stock regulator suspended approvals for IPOs for more than one year to alleviate the pressure of an oversupply of shares and prepare for reforms to the listing system.

On Tuesday five companies said they had received permission to raise a combined 2.1 billion yuan ($347 million), ending the lengthy freeze.

The China Securities Regulatory Commission has said it will give the market a bigger say in the listing mechanism, after Communist authorities pledged at a key meeting in mid-November to let market forces play a more "decisive role" in the economy.

But some market participants are sceptical about reforms, saying the government is loath completely to surrender control and describing the IPO change as window-dressing.

"It appeared to be a market-led reform but the substance still implies (government) administration," said an analyst at a Shanghai brokerage, who declined to be named.

The regulator has announced it will let investors assess the value and risks of IPOs, but stressed that it will retain "oversight" of stock offerings and information disclosure by companies.

The Shanghai broker said the new rules were "like throwing cold water on the market, dealing a heavy blow to those who had overly high expectations towards reforms".

Weakness in the stock market came despite China's domestic growth of 7.8 percent year-on-year in the third quarter of 2013, snapping two quarters of slowing growth. But recent economic data has sparked worries the rebound might not be sustainable.

Authorities have called for a structural adjustment in the economy, curbing traditional sectors such as resources and manufacturing and giving more support for emerging industries. But analysts say those plans have hit shares that are heavily weighted in the Shanghai index.

"Looking ahead, the main board will likely drift with the macro-economy, with no drastic gains or declines," said Zhang of Central China Securities.

China's stock market rose a mere 3.17 percent in 2012, and the weak returns have prompted local investors to seek alternative investment channels, in the face of a lack of choices since they are not allowed to invest directly overseas.

Instead they have sought better returns in property, weakly regulated wealth management products offered by banks -- and even the volatile virtual currency Bitcoin.

Copyright © 2013 AFP. All rights reserved.

AFP: China stock market disappoints on double cash crunch

China Stocks Fall as Bourse on Track for Asia’s Worst Performer.
By Bloomberg News 2013-12-30
8:44:36Z

China’s stocks fell, sending the benchmark index towards a third year of losses in four and putting it on track to become Asia’s worst-performing bourse. Financial and commodity companies led declines today.

Bank of China Ltd. and Bank of Communications Co. dropped at least 1.9 percent to lead declines for lenders. Jiangxi Copper Co. slid 0.9 percent to pace losses for metal producers. Poly Real Estate Group Co. slid 1.6 percent, extending this year’s loss to 41 percent. Fiberhome Telecommunication Technologies Co. (600498) jumped 2.1 percent, adding to a 35 percent rally in 2013 as phone stocks rose after the government said investment in the telecom industry is expected to exceed 350 billion yuan ($57.7 billion) in 2014.

The Shanghai Composite Index (SHCOMP) fell 0.2 percent to 2,097.53 at the close. The index has slumped 7.4 percent this year on concern an economic slowdown is curbing profits and higher money-market rates are boosting lending costs for companies.

“We are in a weak market as the government is starting to tackle structural reforms of the economy,” said Zhang Haidong, an analyst at Tebon Securities Co. in Shanghai. “That may take a toll on short-term growth.”

China unveiled the biggest reform package since the 1990s last month, pledging to allow more private investment in state-controlled industries, after earlier promising to give markets a greater role in shaping the economy.

Bank of China fell 1.9 percent to 2.61 yuan today. Bank of Communications, part-owned by HSBC Holdings Plc, sank 2.3 percent to 3.80 yuan.

Developers Slump
Poly Real Estate, the second-biggest developer, slumped 1.6 percent to 8.03 yuan. The Shanghai Composite’s property stock index has lost 13 percent this year, the worst performer among the five industry groups. Measures tracking energy and material companies in the CSI 300 slumped at least 30 percent for the biggest losses among the 10 industry groups.

Jiangxi Copper, China’s biggest producer of the metal, fell 0.9 percent to 14.02 yuan, extending this year’s slump to 41 percent. Yanzhou Coal Mining Co. dropped 0.8 percent to 8.74 yuan and has declined 52 percent this year.

A measure of phone stocks in the CSI 300 gained 0.5 percent, the most among the 10 industry groups. Fiberhome Telecommunication rose 2.1 percent to 15.38 yuan. ZTE Corp. (000063), the second-biggest phone-equipment maker, added 1 percent to 13.23 yuan. The telecom gauge has jumped 20 percent this year.

China plans to invest 100 billion yuan in fourth-generation mobile networks in 2014, the official Xinhua News Agency cited Miao Wei, Minister of Industry and Information Technology, as saying. He also provided China’s telecom investment estimate for next year.

Stocks Outlook
The Shanghai measure will rise 22 percent next year, according to the median forecast of four brokerages that provided targets including Credit Suisse Group AG. The index trades at 8.1 times projected profit for the next 12 months, close to the cheapest level since July 31. Trading volumes in the index were 30 percent below the 30-day average today, according to data compiled by Bloomberg.

China’s benchmark money-market rate fell for a fifth day after the first weekly cash injection by the central bank this month. The seven-day repurchase rate slid 19 basis points, or 0.19 percentage point, to 4.92 percent as of 3:23 p.m. in Shanghai, according to a weighted average compiled by the National Interbank Funding Center.

The rate will probably stay near a record in the coming quarter as policy makers seek to cut overall debt that a state-run researcher estimates has topped $18 trillion. The seven-day repo will average 4.5 percent, according to the median estimate of 11 analysts and traders in a Bloomberg survey. That’s near the unprecedented 4.65 percent in the three months that started Oct. 1, and up from 3.2 percent in the first quarter.

The Hang Seng China Enterprises Index (HSCEI) slid 0.6 percent today. The Bloomberg China-US Equity Index, the measure of the most-traded U.S.-listed Chinese companies, added 1.3 percent in New York on Dec. 27.

To contact Bloomberg News staff for this story: Zhang Shidong in Shanghai at szhang5@bloomberg.net

To contact the editor responsible for this story: Michael Patterson at mpatterson10@bloomberg.net

China Stocks Fall as Bourse on Track for Asia’s Worst Performer - Bloomberg

 

[beijingwalker]

China's Extreme Poverty Rate Falls by Nearly Three-Fourths Since 2007
by Glenn Phelps and Steve Crabtree
December 23, 2013

World Bank President Jim Yong Kim recently noted that the proportion of the global population living in extreme poverty fell by half from about 40% in 1990 to about 20% in 2010. China's remarkable growth accounts for most of that decline, with hundreds of millions of Chinese to escape poverty during that time.

Gallup interviews more than 2,000 respondents each year in China, allowing for reliable tracking of the decline in poverty rates based on self-reported income over the past six years. Over that limited span, the trend is remarkable: In 2007, 26% of Chinese lived on $1.25 per day or less. Two years later, this figure fell sharply to 14%. After levelling off during the global recession, the downward trend resumed, with extreme poverty falling from 13% in 2011 to 7% in 2012.

 

[eazzy]

True success here, Bravo !

 

[S10]

China should aim to eliminate absolute poverty and homelessness completely by 2030.