International | Oct 23 2009
By Chris Shaw
The latest figures show growth in the Chinese economy continues to accelerate, with September quarter GDP growing by 8.9% in year-on-year terms against the 7.9% growth recorded in the June quarter. The third quarter result brings growth for the year to 7.7%, leading independent China researcher Dragonomics, an affiliate of GaveKal, to suggest achieving the target of 8% growth this year and likely next year will be no problem.
Some other encouraging economic data were also released, with government revenues rising by 5% in year-on-year terms over the first three quarters of the year, Dragonomics suggesting this sets the scene for targets for the year with respect to the fiscal deficit to also be met.
Despite this the China researchers continue to have some reservations about the outlook for China’s economy, offering a number of reasons why they remain less optimistic than most others in the market. Firstly, Dragonomics points out nominal GDP has grown at just 4.7% so far in 2009, which is well below the growth rates of close to 20% that were achieved early in 2008. On its numbers, about 40% of real growth can be attributed to price declines, which implies without stimulus measures aggregate demand in the Chinese economy is still quite weak.
As well, the growth being generated appears entirely an investment story as the group estimates 7.3 of the 7.7 points of growth recorded so far this year are from investment, meaning domestic demand and other factors are having little imput. Dragonomics suggests this proportion is unsustainable, as the average investment contribution to growth is closer to 5.5 points.
Another areas of concern is centred on financial risk, which the analysts see as building up and spreading beyond just the banking system. Dragonomics estimates new loans of 10 trillion renminbi will be made this year, with government estimates indicating this figure could be around the 8 trillion renminbi mark in 2010, both of which Dragonomics notes are well above the sustainable annual trend rate for loan issuance of around five trillion renminbi.
WIth loan issuance so high, banks are having to lay off newly created loans to maintain balance sheet room and required prudential ratios, with finance companies controlled by state owned enterprises being the recipients of many of the loans being layed off. What this means in the analysts’ view is the financial risk of future non-performing loans is now not simply a matter for the banking sector, but it is spreading to the state sector as a whole.
While short-term such moves can continue to support growth as the state owned enterprises have large cash reserves and somewhat opaque accounting techniques, Dragonomics remains of the view at some point in the future there will need to be a big balance sheet clean-up to clear the problems loans from the system and this is likely to have less positive implications for growth when it occurs.