China: the doubts returnChina: the doubts return

Since mid-summer a flow of news has once again cast doubt on the capacity of the Chinese economy to engineer a soft landing. The Asian giant is immersed in a profound process of economic transformation, aiming to reduce the relative weight of investment and exports and increase that of consumption and the services sector. Although this difficult transition is expected to entail lower growth, macroeconomic imbalances have increased as the deceleration has intensified over the last few quarters.1 Until the summer, the Chinese government's rapid and astute management of economic policy had managed to keep at bay fears of a possible hard landing for the economy. Now, however, a series of factors have once again fuelled debate.

The first doubt hovering over the solidity of China's economic growth comes from the latest activity data. Although some indicators have been positive, more attention has generally been paid to those suggesting a weaker trend in the economy (the PMI manufacturing index and the industrial production index), ignoring the fact that retail sales and GDP growth in Q2 were slightly higher than expected. The positive labour market trends have also been ignored: in the first half of the year 7.2 million jobs were created, in line with the 7.4 million generated during the same period of 2014.2 It should be noted, however, that growth in electricity consumption has slowed down sharply in the last few months although these data are more erratic and short-term movements must therefore be interpreted with caution. In summary, an overall view softens the alarmist tone taken by many interpretations although the downside risks have undoubtedly increased.

The second discordant element is related to events in the financial sphere, although clarifications are also important in this case. For example, the 40% fall in the stock market last summer occurred after a strong stock market rally (140% between August 2014 and June 2015). It is also necessary to take into account the fact that the importance of the stock is relatively inconsequential for the Chinese economy and its volatility is exacerbated by the high presence of minority investors (around 80%).

Lastly, the third of the factors causing some confusion over the last few months has been the economic policy decisions taken by the Chinese authorities. Specifically, the summer's episodes have highlighted the government's growing tension between favouring a more market-led economy with clear long-term advantages and the habit of acting decisively whenever there is the risk of an economic slowdown. For example, in the monetary area, whereas the government announced that the renminbi's value would be backed by greater market influence in mid-August, which at that time resulted in the currency depreciating by 3% against the dollar, a few days later it acted categorically to stop the acceleration of capital outflows (limited, however, given that the financial account is not very open). Along the same lines, cuts in the interest rate and cash reserve ratio to support the slowdown are not helping to contain credit. And there is no less juggling on the fiscal front. The higher expenditure on infrastructures announced recently in the right direction to ensure a soft landing but it ignores the need to clean up public finances and abandon the investment model of the past. Consequently, and in spite of the success we still attribute to China in its desire to become a more modern economy, the risks of going off-track have increased.

1. See the Focus «Is Chinese public debt a source of risk?», published in MR06 2015.

2. See Lam, M.R.W., Liu, X. and Schipke, M.A. (2015), «China's Labor Market in the New Normal» (No. 15-151), International Monetary Fund, for an analysis of the robustness of the Chinese labour market.