China’s headline economic data released on Thursday showed growth of 3.2 per cent in the second quarter, a strong rebound from the first three months of the year when the country reported its first contraction since the end of the Cultural Revolution in the mid-1970s.
That puts the overall decline for the first half of the year at just 1.6 per cent — an enviable performance compared with most big economies still struggling with the pandemic that began in the central Chinese city of Wuhan.
The “fundamentals” of China’s growth “have not changed and will not change”, state media quoted President Xi Jinping as saying after Thursday’s figures were published.
But therein lies the problem.
The solid rebound was only achieved with Herculean effort from an interventionist state falling back on the same tools it has relied on since the financial crisis of 2008.
A bit of digging reveals investment by state-owned enterprises in the first half of the year rose by 2.1%, while investment by private companies fell by 7.3 %
Even before the first virus cases were discovered in Wuhan, the economy was struggling with massive over-investment, particularly in redundant real estate projects, mounting bad debt, growing dominance of inefficient state enterprises and chronic underconsumption.
The government’s response to the collapse of growth in the first quarter has exacerbated all these problems.
Financial regulators are warning of a flood of new bad loans and a surge in unregulated shadow banking even as Beijing opens the credit floodgates to get the economy moving again.
The build-up of debt in the economy in the aftermath of the 2008 crisis was the fastest and biggest in history and the pace has accelerated to record highs since the start of the pandemic.
Despite years of official rhetoric on the need to create a consumer economy and reduce reliance on investment as the main driver of growth, China’s household consumption as a percentage of gross domestic product remains extraordinarily low — less than 40 per cent and on a par with countries such as Gabon and Algeria.
In the UK, US and other developed economies, household consumption is about 65-70 per cent.
The effect of the virus on the retail and services sectors has hammered consumption, with official retail sales down 11.4 per cent in the first half.
That has prompted Beijing to boost growth through debt-fuelled investment, as it did in the wake of the global financial crisis. Once again, the drive has been led by investment in infrastructure and real estate, and it has been dominated by the sclerotic state-owned sector.
Chinese experts estimated last year there were at least 65m empty apartments in the country following a decade-long construction boom.
Despite this, real estate investment increased 1.9 per cent in the first half of 2020 even as overall investment declined 3.1 per cent.
A bit of digging into Thursday’s data release reveals investment by state-owned enterprises in the first half of the year rose by 2.1 per cent, while investment by private companies fell by 7.3 per cent.
This important data point was conveniently absent from the English press release provided to most international investors. But it is in keeping with a three-year plan recently approved by Mr Xi to enhance the role of state enterprises in the economy at the expense of private and foreign-invested businesses.
China’s roughly 130,000 state enterprises are riddled with inefficiency, corruption and waste. But in a time of national crisis they are an indispensable source of employment and stability for the ruling Communist party.
As the virus continues to rage across much of the world and as relations with the US and other important trade partners worsen dramatically, China’s leaders have clearly decided to revive the old strategy of debt-fuelled, state-dominated investment.
A decade ago, some economists liked to describe the Chinese economy as a bicycle that needed to maintain a certain speed or it would tip over and crash.
Today it is more like a bicycle laden with enormous boxes of debt, ridden by a drunk and with strategic competitors such as the US trying to knock it over.