China elec Mar15China’s economy has not had a good start to the year.  Central bank governor, Zhou Xiaochuan, admitted at the weekend that growth had “tumbled a bit too much“, adding:

China’s inflation is also declining, so we need to be vigilant to see if the disinflation trend will continue, and if deflation will happen or not”

The chart above of electricity consumption highlights the problem:

  • It soared 15% in 2010 as China’s stimulus programme took hold, after 6% in 2009
  • It then held at 12% in 2011 before dipping to 5% in 2012
  • More stimulus then pushed it up to 8% in 2013, but it fell back to 4% last year (green line)
  • And in the first 2 months of 2015, it was up just 2.5% (red square)

Even more revealing is that the January-February data showed consumption by secondary industry (the largest single consumer) was up only 1.5%.  Heavy industry actually showed a fall of -0.4%.  This confirms there was no recovery after the downturn in November, when 2000 factories were told to cutback output in order that Beijing might have clearer skies for the APEC Summit.

The key issue is that the government is now entering the really difficult part of its transition to the announced ‘new normal’ economic policies.  Until recently, many had assumed this would be relatively painless – the government would simply wave a magic wand, and suddenly everything would be going well.

But reality isn’t like that.  You have to do the painful bit first, in China’s case by cutting back sharply on wasteful investment.  As Premier Li warned China’s parliament last month:

This is not nail-clipping. This is like taking a knife to one’s own flesh.  But however painful it might be, we are determined to keep going until our job is done.”

This is why I have argued for the past year that China’s economy may well see zero growth for a period between now and 2017.  President Xi has been very clear about the importance of moving into the ‘new normal’ economy.  And he has a number of initiatives underway, such as the new Silk Roads and the Asian Infrastructure Investment Bank, that will produce growth in the second phase of his leadership after 2018.

But in the short-term, it would make political sense for him to take the pain of restructuring in 2015-16.  After this, he can then hope to point to ‘green shoots’ of recovery in 2017, in the run-up to his reappointment in March 2018.

Thus Xi argued on Saturday at the Boao Forum:  “China’s economy shouldn’t be viewed only by its growth rate“.