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26-04-2017 | Insight

Chinese Growth Miracle

  • Jeroen Blokland
    Portfolio Manager, Robeco Global Allocation team
  • Lukas Daalder
    Chief Investment Officer

Last Monday, the Chinese government published economic growth numbers for the first quarter of 2017. And they were pretty healthy. Growth accelerated versus the previous quarter, closing Q1 at 6.9%. This means the Chinese economy is not only growing faster than its target of 6.5%, but is also showing an impressive stability in the reported growth rate.

In terms of the latter, China's growth numbers are so stable that they arouse suspicion. Over the last eight quarters, growth has consistently been between 6.7% and 7.0%, a difference of just 0.3%. We never see such a minimal margin in growth numbers anywhere else. Take the US, for instance: over the last two years, US growth has varied between 1.0% and 3.3% – a range of 2.3%. In the ‘boring’ Eurozone, the difference was even greater (3%), despite absolute growth rates in both the US and the Eurozone being much lower than in China. The Chinese bureau of statistics clearly possesses an amazing box of tricks.

And the growth rate itself? Still nearly 7%, despite China managing to outgrow to some degree its status as an emerging production machine. Using the pejorative ‘Made in China’ is selling the country short these days. Of course, the Chinese state is still building bridges to nowhere, but other elements within the economy, such as the consumer, have taken on a greater importance. The average wage of Chinese laborers has more than tripled over the last ten years, gradually improving the economic balance. Normally, this process of a maturing economy is coupled with lower growth. In general, consumer spending rises more slowly than investments in infrastructure and urbanization. With this in mind, economic growth of 7% is strikingly high, especially when you consider that China is aging rapidly. It's no coincidence that China has given up on its one-child policy.

But a miracle? Err, no, not really. Although it’s difficult to define what constitutes a miracle, the high growth rate in China is definitely not a good example. After all, the Chinese economy is built to a significant degree on debt. The image below shows that since 2009 the growth in corporate debt has risen invariably faster than economic growth. And Chinese household debt too has increased sharply in recent years, partly due to an overheated real-estate market. So the growth rate of the Chinese economy is literally being financed by debt.

Keeping an economy running on the basis of burgeoning debt levels is, of course, not exactly the most fantastic growth model. Greece comes to mind. What's more, it's finite in nature. Err, Greece, again. The combined debt mountain of Chinese businesses and households – now more than 200% of GDP – is larger than in most other emerging countries. Of particular concern is the speed at which companies are accumulating debt. What's more, the most recent numbers indicate that the government has not yet managed to cool the whole thing down. By the way, in most Western countries and in Japan, the percentage of debt to GDP is at least as high.

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And there's another way in which China is distinct from countries like Greece and Japan. Government debt is relatively low. In the case of China, it's still below 40% of GDP. Compare that to Greece's 181%, and Japan's 235%. The debt ratio of always prudent Germany is 69%. This is another reason why, for the time being at least, investors are happy to ignore the Chinese debt mountain. After all, as more companies succumb to the debt burden they have accumulated in recent years, the government can ‘simply’ bail them out. Especially in a country where companies are often state owned anyway. At any rate, that is the idea. China is a classic example of ‘kicking the can down the road.’

Yet we must not lose sight of Chinese debt levels. As stated above, it's the rate at which debt is increasing that is a cause for concern. We have now arrived at levels at which there’s very little room for maneuver left. The trend of financing growth with debt is sort of reaching its denouement. Furthermore, the Chinese government's wallet is not bottomless. Slower debt accumulation is therefore essential. And Chinese growth will have to slow somewhat further over the coming years. And if that doesn’t happen? Now, that'll be a miracle!

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