China Rebalancing Update – Q3 2013
China’s third quarter GDP numbers have been released. This gives us an opportunity to update our rebalancing outlook as well as assess the effectiveness of our indicators thus far.
The three quarterly scores we compiled for China during 2012 showed that rebalancing was on a positive trend, but at a pace that was slower than ideal.
This conclusion is in line with what the revised annual GDP by expenditure numbers reveal. The household consumption share of GDP ticked up slightly in 2012 (+0.23 percentage points).
While this is an improvement relative to the trend of falling consumption throughout the 2000s, it is too slow to achieve rapid rebalancing. Moreover, the growth of household consumption in 2011 was actually greater than 2012 (.8 vs .2 percentage points).
Things were slightly better on the investment side. In 2012 the investment share of GDP fell .6 percentage points, a step in the right direction. This is, however, is still slower than the 1 percentage point annual reduction in investment outlined in our policy brief.
Overall, the leading indicators for economic rebalancing were largely on track, showing a small amount of progress towards rebalancing.
Let’s go through the most recent quarter to get a sense of where rebalancing currently stands.
1. Urban Disposable Income Growing Faster than GDP
The gap between GDP growth and urban disposable income growth in the third quarter remained constant at 1 percentage point. Given the lack of change, this indicator remains slightly negative.
Indicator = Slightly Negative (2/5)
Figure 1 GDP and disposable income percent growth, year over year (ytd.)
2. Positive Real Interest Rates on Deposits
Real interest rates on deposits fell once again in the third quarter, dipping down into slightly negative territory (-.1 percent). Inflation has ticked up steadily throughout the year, but there has been no corresponding increase in the deposit rate. As a result, the real interest rate is now a full 1.2 percentage points lower than it was a year ago. Given that the rate is hovering around zero, this indicator will remain neutral.
Indicator = Neutral (3/5)
Figure 2 Real interest rate on one-year deposits
3.Residential Real Estate Investment Growing at a Slower Pace than GDP
The gap between real estate investment and GDP growth shrunk by two percentage points in the third quarter, but still remained large (+10 percentage points). The continued rapid growth of real estate investment is an anomaly given the central governments continued exhortations that real estate controls have not been lifted. This indicator remains negative.
Indicator = Negative (1/5)
Figure 3 GDP and residential real estate investment percent growth, year over year (ytd.)
4. Loans to Small Enterprises Growing Faster than Large Enterprise Loans
The data source for this indicator is changing slightly. The PBoC is no longer consistently releasing a series on the total stock of enterprise loans. Instead, there are quarterly growth rates for loans by enterprise size. Due to these changes, this indicator will switch to looking at the gap between small enterprise and large enterprise loans. Small enterprise loans are growing somewhat faster than large enterprise loans, making this indicator slightly positive.
Indicator = Slightly Positive (4/5)
Figure 4 Total enterprise and small enterprise loan percent growth, year over year (ytd.)
5. Growth of the Tertiary Sector Faster than the Secondary Sector
The tertiary sector continued to grow slightly faster than the secondary sector in the third quarter, 8.4 percent vs. 7.8 percent. While the gap is somewhat smaller than the previous quarter, this is still a good omen for economy rebalancing. As a result, this indicator remains slightly positive.
Indicator = Slightly Positive (4/5)
Figure 5 Secondary and tertiary sector percent growth, year over year (ytd.)
Overall: The outlook for economic rebalancing remains unchanged relative to the second quarter. On the negative side, the growth of disposable income remains weak, real deposit rates are hovering around zero, and real estate investment continues to outpace GDP by a large margin. In contrast to these negative indicators, loans to small enterprises continue to grow quickly and the tertiary sector has outperformed the secondary sector for three straight quarters. The overall outlook for rebalancing remains neutral.
Previously, we assigned letter grades to each quarter’s rebalancing score. The grades, however, seemed overly negative relative to actual conditions. As a result we will stick with the same number scale but assign an outlook of Negative, Slightly Negative, Neutral, Slightly Positive, or Positive.
Overall Grade = (14/25) Neutral
The overall rebalancing trend in the diagram below has been expanded to include the first quarter of 2012, updated to account for the new data source, and tweaked to improve consistency across all quarters.
Figure 6 Rebalancing Trend