Barclays analyst Aroop Chatterjee just released a brutal series of slides about the Chinese economy, titled “Unsustainable Stability.” It makes for a pretty grim read.
The Chinese economy has been slowing for years, and the double-digit growth rates of the 2000s are a thing of the past. China is currently recording the slowest growth in decades, running at 6.9% in the third quarter.
That’s according to the authorities — many economists think the true figure is even lower.
There are a bunch of reasons to be worried — here are the main ones drawn up in the slides:
The growth problem is largely structural. China has a huge demographic challenge to face up to — the country’s “total dependency ratio,” which measures the number of children and elderly people in comparison to workers, has now stopped falling (as it did from the 1970s). Now it will increase for decades, putting China in the same difficult position as some advanced economies.
It’s “one massive construction site.” China’s real estate investment has been tremendous — construction investment being worth 10.4% of GDP is an extremely unusual situation. Paired with the demographic challenge, that could be a major mis-allocation of capital, ripe for a nasty correction.
There’s “large excess capacity” in the industrial sector. Profits are falling as the commodity boom collapses, returns on equity are weak in state-owned enterprises, and production growth is declining in pretty much every resource-intensive sector.
Everything now rests on consumption. The transition from a low to middle-income economy required colossal investment, industrial development and manufacturing, which came with massive saving and trade surpluses.
The move from middle to higher income levels won’t look the same, and pretty much everything rests on the transition towards consumption. There are positive signs, like the emergence of online commerce, but in terms of urban and rural consumption, the growth rates are relatively steady, or even declining a little.
Barclays’ own fitted GDP measure suggests that official GDP statistics aren’t telling the full story — the analyst estimate indicates growth of more like 5.6% than the 7% reported in Q2. Measures like the Li Keqiang index, which takes into account electricity production, rail freight and bank loans, suggest growth is even lower.
One of the problems with China’s rebalancing efforts is the tremendous levels of additional debt the country has racked up since the financial crisis in 2008. Corporations have become particularly highly leveraged.
The challenge faced by the Chinese government is sustaining growth levels at which those companies can service their own debts, while making the important reforms that the economy needs to transition — which tend to reduce growth.