China Rebalancing Update - Q4 2013

January 27, 2014 3:00 PM

The Q4 2013 economic data for China is now out, so it's time to update our rebalancing indicators:

1. Urban Disposable Income Growing Faster than GDP

The gap between GDP growth and urban disposable income growth persisted into the fourth quarter, meaning that disposable income has grown more slowly than GDP for all of 2013. Although the gap between the two narrowed from -1.0 to 0.7 percentage points, this indicator remains in slightly negative territory.

In a statement accompanying the most recent data release, the National Bureau of Statistics noted (CN) that if GDP is calculated on a per capita basis, the difference between the two numbers narrows significantly. The population growth estimate is only available annually, making it impossible to calculate per capita GDP on a quarterly basis. At the beginning of a new year, however, it is possible to make this adjustment for the previous year. The chart below shows that while on a per capita basis the growth rate gap was smaller in 2013, the same methodology shows a larger gap in 2012. What's important is that the relevant analytical point still stands. Disposable income growth relative to GDP in 2013 was worse than in 2012.

Indicator = Slightly Negative (2/5)

Figure 1 GDP and disposable income percent growth, year over year (ytd.)

GDP and DI



2. Positive Real Interest Rates on Deposits

After dipping into negative territory last quarter, real interest rates returned to positive levels in the fourth quarter. The driver of this change was a drop in inflation, which is now running at 2.5 percent. The benchmark interest rate has remained unchanged for more than a year, despite large fluctuations in China’s more market-determined rates. Due to the increase, this indicator is upgraded to slightly positive.

Indicator = Slightly Positive (4/5)

Figure 2 Real interest rate on one-year deposits

Real Interest Rate



3. Residential Real Estate Investment Growing at a Slower Pace than GDP

The gap between real estate investment and GDP narrowed slightly in the fourth quarter, 0.3 percentage points. The overall gap between the two remained exceptionally large. The persistence of excessive investment in residential real estate is the largest drag on Chinese rebalancing efforts. Despite government efforts, the share of real estate investment in GDP continues to rocket upwards, increasing the danger of a subsequent housing market correction. Naturally, this indicator remains negative.

Indicator = Negative (1/5) 

Figure 3 GDP and residential real estate investment percent growth, year over year (ytd.)

 RE and GDP



4. Loans to Small Enterprises Growing Faster than Large Enterprise Loans

In the fourth quarter loans to small enterprises continued to grow more rapidly than loans to large enterprises. In fact, this divergence increased slightly by 1.7 percentage points relative to the previous quarter. This indicator remains slightly positive, but if the gap continue to grow it will be upgraded to 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 fourth quarter, 8.3 percent vs. 7.8 percent. As in the previous quarter, the gap narrowed somewhat (-0.1 percentage points). The tertiary sector has now grown faster than the secondary sector for an entire year, a sign that China’s over-industrialized growth model may be on the wane. This indicator remains slightly positive.

Indicator = Slightly Positive (4/5)

Figure 5 Secondary and tertiary sector percent growth, year over year (ytd.)

2nd and 3rd Industry



Overall: For the first time in 2013, China’s early indicators of economic rebalancing ticked up into positive territory. This means that although rebalancing during 2013 was likely on the sluggish side, there is hope that things may begin to accelerate in 2014.

The one key trend to watch will be whether the government can successfully tame the excessive growth of real estate without crashing GDP growth. China must find a way to grow without real estate accounting for an ever-larger share of the economy.

Another important factor in 2014 will be whether the central bank makes a much needed change to the benchmark deposit rate. The closest substitutes for deposits, short-term wealth management products and online funds like Alibaba’s Yu’e Bao, offer rates many times higher than traditional deposits. This distortion continues to be an implicit tax on China’s savers and a drag on consumption growth.

Overall Grade = (15/25) Slightly Positive

Figure 6 Rebalancing Trend



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