China did not end up with its current imbalances as part of a natural process and therefore the transition itself is unlikely to be natural.
China is both the here and now and the future, it has untold potential, a growing debt problem (here, here, here, here, here and more in the links below) and a “government” still “seemingly” capable of pissing great distances into the wind. But working out China for many is tougher than working out the meaning of life itself.
I have concerns over the ease and the speed with which many believe China can rebalance itself from an export led/debt financed investment growth model to a debt financed services and consumption growth led model. That is how China can transform itself from a manufacturer of goods to the world and builder of infrastructure, to a perfect model of advanced western capitalism? Odd really given that neither model appears to be stable or perfect in its entirety, both representing forms of economic extremism, excess and various levels of maturity/immaturity.
The issue is not debt alone, but the rate at which it has recently accumulated, especially post 2008 and the imbalanced nature of the economy upon which it rests. Just because an economy has potential, just because compared to more mature developed country metrics China has some way to go in absolute terms, does not mean that the current force exerted at the turning point is inconsequential.
If you have been “watching” you will have noticed a fairly sharp deceleration in global economic activity since the middle of 2014. World trade volume growth in particular has been heading into recession type territory:
Investment is key to maintaining production, growing production, increasing the productivity of employees, in allowing goods to be transported quickly and efficiently, in providing better health care and education and all types of infrastructure key to allowing an economy’s resources to be used efficiently. Growing investment typically leads to growing output and incomes, but capital investment also requires return, and a good part of that return is private consumption expenditure.
So why should we be concerned over the most recent quarter’s large capital investment component of current Chinese GDP? Much too large an investment component, a much smaller private consumption component and a decline in net exports.
Paul Weller: “I stood as tall as a mountain; I never really thought about the drop; I trod over rocks to get there; Just so I could stand on top; Clumsy and blind I stumbled;…I didn’t stop to think about the consequences; As it came to pieces in my hands.”
The 2008 crisis told us that there was a mismatch between asset values and debt, asset values and future return, and debt and economic growth as well as some rather large structural economic imbalances.
We have tried to delay the eventuality implied by the difference in the hope that the “true” magical economic growth rate should return. Have we built up a bigger monster, and if so, how do we slay the beast?
I briefly read the HSBC China Manufacturing PMI, and while it showed a positive reading, I am not so sure how this can be viewed as immediately positive. It is a mild uptick from a long run of negative readings, and well within the range of movement that is just as likely to signify continued weakness as recovery. But, the bigger picture at the moment is the more important picture and all short term data is meaningless without its context.