China’s economy is in trouble this year, and it is expected that GDP growth may not be guaranteed, but China no longer cares about numbers and claims to embrace a high-quality economic growth model. From Xi Jinping to Chinese economists, high-quality economic growth is China’s future, but what does high-quality growth mean?
According to Quartz, driving China’s GDP growth rate in the past has been high investment spending in infrastructure and real estate, which account for about 25% to 30% of China’s GDP. With ghost towns sprawling and property developers heavily indebted in recent years, the Chinese government has begun to realize that the staggering rates of GDP growth over the past few decades are no longer possible or sustainable. The bankruptcy of Evergrande is an example. The most indebted developer in the world has been criticized by Xi Jinping for exaggerating or fictitious growth, which is not true.
According to Michael Pettis, a professor of finance at Peking University School of Management, China recognizes that spending on infrastructure and real estate is of low value because many are unproductive and will not create wealth. The so-called high-quality growth refers to consumption, exports and business investment.
The World Bank has a similar explanation. In December last year, a report pointed out that in order to achieve high-quality growth, China needs to rebalance from “external demand to domestic demand, from traditional investment and industry to consumption and services, from the state to the market and private industry, and from From high carbon economy to low carbon economy”.
However, Michael Pettis is not very optimistic about China’s economic transformation. He pointed out that China has five ways to go. One is to continue the current practice, focusing on investment in infrastructure and real estate, and the growth rate of debt will continue to exceed GDP. The second is to reduce unproductive investment and replace it with productive investment, such as high-tech industries. But he argues that it is difficult to divert such a large portion of Chinese investment into relatively small areas, and that China’s past efforts have never been successful.
Reduce unproductive investment and replace it with consumption. However, household spending needs to increase by at least 10% to 15% of GDP. He also thinks it is unlikely, because supporting households means sacrificing local governments. China has asked local governments to increase spending on education, health care and housing services, but local governments The government is already heavily indebted, so there will be a lot of political resistance.
In addition, China has a huge trade surplus, and it is not feasible to reduce non-production investment to increase the trade surplus. The last resort is for China to directly reduce non-productive investment, resulting in a sharp drop in GDP growth. Michael Pettis believes that China will continue on the first path for longer, and then enter the fifth path, if so, China will fall into a long-term economic weakness, just like Japan decades after starting in the 1990s.
China’s economic headwinds include a virus-clearing policy dragging consumption, a sluggish property market, supply shocks that push up raw material costs, and tensions with the West. Five provinces, Zhejiang, Anhui, Chongqing, Sichuan and Hunan, have lowered their growth targets for this year. Morgan Stanely expects China to grow by 5.5% for the full year of 2022, while Fitch Ratings is more pessimistic, seeing growth of only 4.8% this year. Capital Economics China economists believe the slump in China’s property construction will intensify this year and the boost from last year’s surge in exports will not be repeated. Some experts also believe that China’s official language is evolving, and one of the keys is that the economy is in a structural slowdown, and the shift to a high-quality economic growth model just gives them a step down.