Deflationary pressure, weak property prices, slowing growth, zombie companies. It this Japan? No, it’s China.
For years, policy makers in Beijing have seen post-1990 Japan as a cautionary tale. Now, in many ways, China’s economy of 2015 resembles that of Japan in 1995. That’s a problem, not least for the Communist party. In the past two decades, growth in Japan’s real per capita income has averaged 1 per cent a year. If that is all Chinese leaders can muster over the next two decades, the chances are they will find themselves in the dustbin of history.
Fortunately for the men who run China, comparisons are overdone. The biggest difference is the most obvious. When Japan began its years of stagnation in the early 1990s it was already rich. On a per-capita basis, income was 80-90 per cent of US levels. China, as miraculous as its growth has been, is still nowhere near there. On a purchasing power parity basis, its per capita income is just above 20 per cent of the US level. That matters. It is easier for a poorer country to close the gap. For all its problems and inefficiencies — in fact, precisely because of its problems and inefficiencies — there are relatively easy things China can do to keep its economic show on the road.
Rather than the Japan comparison, it is better to talk about China’s “new normal” as Xi Jinping himself has done. China must, the president said last year, “adapt to the new normal condition based on the characteristics of China’s economic growth in the current phase”. So what does the new normal (with Chinese characteristics) look like?
Until recently, the economy raced along at 10 per cent a year. That is over. This is partly because the demographics have turned. The labour force has started shrinking and the flood of internal migrants has slowed. As wages rise, the renminbi strengthens and international demand stalls, manufacturing is less and less important to the economy. In the new China, net exports already make precisely zero contribution to gross domestic product.
The technocrats know this. They are trying to guide growth gently lower, limiting credit when they can, and turning on the taps again when they lose their nerve. Last year, growth probably sagged below 7.5 per cent, its slowest pace in 25 years. This year, it could dip lower. Within a few years, China is likely to be growing at 5-6 per cent — and that is barring some kind of systemic crisis.
A second feature of the new normal is deflation, or rather very low inflation. After years of worrying about rising prices, China’s authorities now have the same disinflationary problems as everyone else. Last year, consumer price inflation dipped well below 2 per cent. That was one reason why in November the central bank came out with all guns blazing by cutting rates.
Price weakness is partly due to low commodity prices, including oil. That, however, is a somewhat circular argument since global commodity prices have fallen in response to slackening Chinese demand. Equally important is chronic overcapacity in much of China’s economy, particularly in the state sector. Many state-owned companies are being kept artificially alive. So steel mills make steel that no one wants and smelters churn out copper no one can use. Factory gate prices have fallen for more than 30 straight months. There is also overcapacity in the housing sector, the reason prices swooned last year. The new normal will mean a steady flow of restructuring and bankruptcies.
A third new feature is the shifting balance between different parts of the economy. While the state sector is a brake on growth, the private sector is an accelerator. Much of the private sector struggles to obtain credit. Debt, however, is still rising faster than GDP as credit is sucked into the least-productive corners of the state economy.
Simultaneously, there are signs of a long-awaited rebalancing. In 2013 services for the first time accounted for a greater share of output than manufacturing. Investment is growing at its slowest pace in a decade. Aidan Yao of AXA Investment Managers says last year consumption accounted for a larger share of GDP than fixed capital investment. “We are seeing signs of rebalancing taking place, even if it’s not as fast as people might want,” he says.
The trick for China’s policy makers will be to shift resources from the public to the private sector. More Alibabas, fewer smokestacks. “Economic growth is no longer just about building stuff. It’s about efficiency,” says Arthur Kroeber, head of Gavekal Dragonomics in Beijing. It sounds easy, but it means dislocation and painful reforms. China’s new normal is a journey from here to there.