I’ll be again posting less frequently this week – today, obviously, Wednesday and also on Friday – as I am on still on leave. The blog returns to normal from the week starting 27 July.
By John Richardson
SOME graphs are worth many thousands of words, and so here are four graphs to start your week off.
This first graph shows the decline in the growth of fixed asset investment in China, which is very important to monitor as some 50% of GDP has been driven by investment.
Nobody should, as a result, take the official GDP Q2 growth rate that seriously (official growth numbers should never be taken that seriously in China).
It is instead quite likely that real GDP growth is in the low single digits, if not in negative territory, as the economy is rebalanced away from investment and towards consumption.
My second graph, from the same Zero Hedge blog post, is of equal importance:
It shows how the effective rebalancing of the economy away from investment and towards consumption is going to be a long and difficult process.
One of the immediate challenges is that consumer sentiment has weakened because most people in China have been long aware that more painful economic reforms are ahead.
There is another reason why consumption growth has slowed down, which is explained in this chart:
Why does the fall in home prices matter so much for consumption growth? Because of how much of Chinese wealth is tied-up in real estate:
The above fourth and final chart also tells us that the decline in China’s stock markets, whilst acting as a useful wake-up call to wider economic challenges, is by itself not that significant.
What is also important to note is that China has to find a replacement for the lost wealth effect of the credit boom of 2009-2013, which was nothing short of an economic, environmental, social and political disaster.
What form will this replacement take? We know that one of the major political and social mistakes of the credit boom was that it benefited far too few people – the relatively very small rich upper and middle classes who own most of China’s high-end real estate. It is a mistake that China’s government simply cannot afford to repeat under any circumstances.
So when we talk about rebalancing away from investment and towards consumption, we not talking about consumption of lots more luxury autos and designer handbags etc. – the most visible sign, to most occasional thinkers about China, of its economic success.
What we are instead talking about is the $50 refrigerator and the cheap, but perfectly good entirely locally-made smartphone.
For every manufacturing and service company wanting to do really big-volume business in the new China there must therefore be three main priorities: Affordability, affordability and affordability.