China’s Economy Hasn’t Really Been Growing at 8% in the Past Decade
2018 was the worst year for China economically in the past decade. Economic growth in the third quarter sank to 6.5% and the forecast for 2019 is even lower, at 6-6.5%. Apple’s revision of its sales forecast for China warns investors that a slowdown in the second largest economy in the world can have an impact on the global growth. The stock market in Shanghai has also suffered considerably in the second half of 2018. After decades of exponential growth, it is unsurprising for any economy to experience a slowdown. However, the problem with China is that the growth in the past decade has been largely driven by highly unsustainable and unhealthy factors. A deeper look in the economic system reveals that the GDP figures are not inaccurate, but largely artificial.
The amount of money in the economy has been growing at a rate exceeding the GDP growth. From 2008 to 2018, China’s broad money supply (M2)1 has grown at approximately 11.4% year-on-year whereas the GDP2 has been growing at an average of around 8.1% in the past decade. This is simply because the government has been injecting liquidity into the market in order to stimulate economic growth and it continues to do so. According to Reuters, last month, China’s central bank injected a net $83 billion (560 billion yuan) into the banking system in a single day.
When M2 grows at a rate faster than GDP, it can lead to a depreciation of the currency and a high level of inflation. The reason the yuan has not depreciated against the dollar is that of tight foreign exchange controls that limit the amount of money exiting the economy. As a result, a huge amount of money trapped in the economy lead to the housing market bubble.
Housing prices in China have risen at exponential rates, particularly in large cities such as Shanghai, Shenzhen and Xiamen. According to residents who have been active real estate investors, the prices of housing in Shanghai has flipped 15 to 20 folds since 1998. Figures from the Bureau of Statistics of China show that the housing prices in over a dozen cities
have increased from 200% to 600% over the past ten years. However, this does not indicate that people’s income levels or standards of living have improved by this extent. In fact, the average price of a 100m2 house in major cities is equivalent to 30 years of income from the household, or two persons. Societal standards and expectations force people to empty their wallets and take on major mortgage loans to purchase properties they cannot actually afford.
In addition to absurdly high housing prices, the cost of living in cities has been increasing at a level much beyond the stated 2.5% inflation rate, according to Chinese residents, which prompts one to wonder exactly how the inflation figures are being calculated. Taking into consideration the rate at which housing prices have risen, it is evident that the inflation rate is not an accurate reflection of living costs. Raising prices have been another contributor to GDP growth. The concept is simple – a loaf of bread sold at $1 last year and at $1.1 this year indicates a 10% economic growth when the actual production is the same.
Aside from property sales and rising costs, infrastructure projects have been another major driver of the GDP. China’s infrastructure is one of the reasons that allowed the country to become a major economy in the world. However, these projects are highly costly and rarely profitable for local governments – but it counts towards GDP, which is the main performance indicator that allows one to be promoted.
China’s GDP hasn’t really been growing at 8% because much of the growth can be attributed to the money injected into the market, the housing market bubble and infrastructure expenses, which are neither healthy nor sustainable for the economy. Some economists estimate that property sales and construction alone account for 20-25% of the GDP, although official data is absent. The slowdown of the Chinese economy reflects a larger problem than a temporary decrease in demand. The economy hasn’t been as powerful as it seemed, and the government has done everything it could to keep the numbers pretty. It has reached a point where there’s only so much that can be done.
1. M2 is an economic term also known as “broad money”, it includes short-term time deposits in banks and certain money in money market funds in addition to M1, which composes of coins and notes that are in circulation and other money equivalents that can be converted easily to cash. M2 data source: CEIC data
2. Data source: World Bank