Tony Alexander

Economic Commentaries

China’s Economy

Wednesday July 31st 2013

Growth is slowing and rebalancing does not appear to be happening.

By and large recently released economic indicators in China show growth continuing to slow with an increasing probability that this year’s official target of 7.5% GDP growth will not be achieved. The manufacturing sector in particular is displaying weakness. Both the official and unofficial Purchasing Managers Indexes sit at weak levels with the HSBC measure falling to an 11 month low of 47.7 in July from 48.2 in May.

But not all sectors are quiescent. The housing market remains buoyant in terms of price rises, land sales, and construction – much to the dismay of the central authorities. It is desired that the key source of China’s growth shifts from exports to the domestic economy. But while that explicitly includes the housing sector there is concern about the impacts of rapidly rising house prices should a correction occur – or should they keep rising and undermine home ownership goals.

The monthly index of house sale prices in the top 100 cities compiled by Soufun Real Estate rose by 0.8% in both May and June and prices on average in June were 7.4% up from a year earlier. In May the annual rate of change was 6.4% and a year earlier close to -1.9%.

Strong efforts have been made to curb a huge rush of money into residential property but seemingly without success People appear to have found ways around rules regarding the purchase of second properties with regional governments possibly facilitating the purchases. This is because regional governments in many instances gain the bulk of their revenue from land development so suffer tremendously and build dangerous debt levels when building development activity stalls.

People have divorced in order to get around the one purchase rule and methods have been developed to reclassify apartments as commercial property.

The People’s Bank of China may have had the housing market in mind when during the second half of June they allowed overnight money market rates to soar and penalise banks. They may have been sending a signal of their displeasure at continued financing of speculative home buying and construction activity.

On the face of it there appears to be a bubble with pyramid-like characteristics underway in large city residential real estate markets and there is a clear risk that should it burst – perhaps even through ham-fisted policy implementation – there could be a strong rise in societal disorder.

A key economic problem is that at the same time as this bubble may be underway manufacturing performance is worsening, worries about public debt and bank lending quality are soaring, and export growth is faltering. In the June quarter export receipts were ahead less than 4% from a year ago following over 18% growth in the March quarter and 10.5% growth a year earlier.


The RMB has changed by little against the USD over the past month but the NZD has risen near 3%. China continues to make slow moves toward internationalisation and improved convertibility of the Yuan. But whereas a couple of years ago thoughts swirled around how much the Chinese currency would rise, now there is a growing camp of analysts who believe that the Yuan may instead weaken as people increasingly shift private funds out of China to perceived “safer” investments elsewhere – such as foreign residential property.