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China Rebalancing Update—Q1 2013

by | April 24th, 2013 | 01:37 pm

China’s first quarter economic data is out and it is now possible to do an update on the progress economic rebalancing. For an explanation of these indicators and why they are important, refer back to our original post on the topic.

1. Urban Disposable Income Growing Faster than GDP

Urban disposable income growth dropped sharply in the first quarter, falling below GDP growth for the first time in a year. Disposable income grew at 6.7 percent (down from 9.6), versus 7.7 percent for GDP. This indicator is now downgraded from slightly positive to slightly negative. If urban disposable income continues grow slower than GDP, it is unlikely private consumption will increase as a share of overall GDP.

Indicator = Slightly Negative (2/5)

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


2. Positive Real Interest Rates on Deposits

Interest rates remain positive on one-year deposits, but with significant monthly volatility. An uptick in inflation in February pushed real interest rates down into negative territory. This can most likely be attributed to seasonal distortions involving the Chinese New Year. Overall, this indicator remains slightly positive, but vulnerable to an increase in inflation later in the year.

Indicator = Slightly Positive (4/5)

Figure 2 Real interest rate on one-year deposits

 Real Int Rate

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

Residential real estate grew rapidly in the first quarter, outpacing GDP growth by a wide margin. The gap in nominal growth rate between the two increased from 1.6 percent to 11.5 percent. This growth differential is the largest we’ve seen since Q4 2011. As a result, this indicator is now being downgraded from neutral to slightly negative. If this trend continues, we will downgrade the indicator even further. Continued investment growth at this pace is likely to attract further government action to curb the property market.

Indicator = Slightly Negative (2/5)

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

 Real Est Inv

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

Loans to small enterprises continued to grow faster than overall loans, but at a reduced rate. The gap between the two further narrowed from 3.2 percent to 1.2 percent during the first quarter. This indicator remains at slightly positive. If the growth rates continue to converge we will downgrade this indicator to neutral.

Indicator = Slightly Positive (4/5)

 Figure 4 Total enterprise and small enterprise loan percent growth, year over year (ytd.)

 Ent Loans

5. Growth of the Tertiary Sector Faster than the Secondary Sector

Those looking for a bit of good news will find it in this indicator. For the first time in several years the tertiary sector is growing more quickly than the secondary sector. As a result, this indicator is now upgraded from neutral to slightly positive. It remains to be seen if this trend will outlast the current weakness in the manufacturing sector.

 Indicator = Slightly Positive (4/5)

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

 Sector Growth


Overall: The outlook for Chinese economic rebalancing continues to worsen relative to the first half of 2012. The drop in urban disposable income and the boom in residential real estate investment are problematic and cut sharply against the progress we have seen over the past few quarters. One should not put too much stock in the data from any one quarter, but it is hard to make the argument that the Chinese economy is rebalancing quickly. This slow progress on rebalancing coincided with above-trend credit growth and below-trend GDP growth in the first quarter. Combined, these factors are pointing to an increasingly negative economic picture.

Overall Grade = D (16/25).


Indicator Grading Scale:

Negative = (1/5)

Slightly Negative = (2/5)

Neutral = (3/5)

Slightly Positive = (4/5)

Positive = (5/5)

Comments (2)

Given the quality of the data I doubt that much can be taken from 1 or 2 quarters of data ! The income side of the national accounts are guess work. There is a lot of income and spending on services that is not covered at all (idem for explosion of internet purchases). Latest estimates on the underground economy indicate that the service sector and consumption is far larger than reported in the official data. best regards, James

James April 28, 2013 | 11:13 am


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