China’s economic growth will stabilise – just not in 2018

Yu Yongding says optimistic growth forecasts for the Chinese economy overlook the degree to which slowing fixed-asset investment – though good for the long-term health of the economy – will affect near-term prospects, amid a host of financial risks

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A construction worker in Beijing. Though infrastructure investment in China has been increasing as a share of total investment since 2012, it has already reached such a high level that continued growth could worsen resource allocation. Photo: AFP

Published: 1:45pm, 3 Jan 2018Updated: 11:56am, 8 Jan 2018

For the past decade or so, China’s economy has been on something of a roller-coaster ride. As 2018 begins, is the country approaching a new ascent, a steep drop, or something in between?

Prior to the global economic crisis a decade ago, the Chinese economy was growing at a breakneck pace. But when the crisis hit, the growth rate fell relatively sharply. Thanks to a 4 trillion yuan (HK$4.8 trillion) stimulus package, growth soon reached its trough and began to climb again.

Soon after, however, monetary tightening put growth back on a downward trajectory, spurring the government to introduce mini-stimulus packages in late 2011. This produced a moderate rebound, with growth again beginning to slide soon after. Finally, in 2016, growth began to stabilise again. The latest figures show that China’s economy grew by 6.8 per cent in the third quarter of 2017, leading many economists to offer rather optimistic forecasts for the coming year.

CCXI chairman expects China’s economic growth to slow to 6.7pc in 2018

A worker loads cast iron pipes at a port in Lianyungang, Jiangsu province, on December 31. Since late 2013, investment growth in China has been declining steadily, and growth in net exports, too, seems unlikely to offset declining investment. Photo: AFP

I am less sanguine. For decades, fixed-asset investment was the main driver of growth, accounting for almost half of total demand. Its share of China’s gross domestic product today exceeds 50 per cent, while investment calculated as residual capital formation accounts for some 45 per cent of GDP.

Optimism about China’s economic growth in 2018 is not warranted. But this does not mean that China’s prospects are altogether dismal

Yet, since late 2013, investment growth has been declining steadily. In the first three quarters of 2017, fixed-asset investment grew at an average rate of just 2.19 per cent year on year. In the third quarter, investment growth was actually negative, at minus 1.1 per cent. China has not seen such lows in decades.

From the perspective of structural adjustment, China’s declining dependence on fixed-asset investment should be hailed as an achievement. But it will be very difficult for China to sustain aggregate demand amid weakening investment growth.