How many more empty cities like Ordos does China really need? Are 64.5m empty apartments enough, or should there be more? Should we build more steel mills, to add to the current 220MT of over-capacity?
These are the questions facing China’s leadership today, as they debate the economic slowdown. Growth has slowed to a relative crawl as the lending boom has ended. Electricity consumption (red line) is the best real-time indicator of the economy, and as the chart shows:
• It rose 21% in H1 2010, as lending (green) doubled to 1/3rd of GDP
• Growth then slowed to 9% in H1 2011, as the economy over-heated
• And H1 this year saw it grow just 7%
The slowdown in the West means fewer orders for China’s factories, so they need less electricity. Equally, the government’s need to control house prices has reduced this source of major domestic demand.
So what would blog readers do, if they were running China today?
One answer, of course, is to kick off another lending boom. This has already begun to increase again. It was up 16% in H1 versus 2011. And the government is approving new steel mills capacity again, to help boost GDP growth after Q2’s slowdown to 7.6%.
Another way would be to follow the path outlined by expected new premier, Li Keqiang, back in March. Speaking to the National People’s Congress, he stressed the importance of economic reform. In particular, he argued that the power of the state owned enterprises should be reduced in favour of private enterprise.
The first option gives easy wins in the short-term. But as the People’s Daily wrote in February, a failure to reform now will lead to an “even greater crisis” in the future. The second option requires a more long-term approach, accepting some pain today in return for a better future.
But, of course, whichever option is chosen still leaves the problem of China’s housing bubble to be resolved. Prices in Tier 1 cities such as Beijing and Shanghai are now at ratios of 14:1 to average earnings, having risen every year since private ownership was first allowed in 1998.
There is, of course, another option. This is the one that the outgoing leadership seems to have chosen. Aim to do enough in the way of new lending to keep the show on the road, until the new leaders are selected in H2. And then bow out gracefully.