he Chinese government released its headline economic data for the first half of 2018 on July 6, announcing that the GDP growth rate is a robust 6.8 percent. Most analysts agree this means that China is on course to meet its annual GDP growth target of 6.5 percent by year end.
But looking beyond overall economic growth, there are signs that China is far from addressing some of the most serious problems that pose a threat to its economy. In the past year, it has highlighted the importance of reducing high ratios of financial leverage at all levels, and has launched a raft of measures to curb soaring property prices. High on the leadership’s agenda is restructuring the economy to transfer the previous investment-driven model to a more sustainable one.
But the latest data shows that this is not happening. For example, official data shows that in the first half of 2018, total real estate investment increased by 9.7 percent compared to the same period of 2017, a figure much higher than the GDP growth rate. This means that China’s economic growth is still largely driven by investment, or more specifically by the real estate sector.
In the meantime, data released by the Ministry of Finance on July 16 shows that revenue from land grant fees – fees levied on real estate developers by provincial and local governments – increased by an astonishing 43 percent from last year, indicating that provincial and local governments are continuing to push expansive real estate policies.
These figures appear counter-intuitive in that there seems consensus among both experts and the authorities that curbing the real estate sector is crucial for reducing the debt leverage level. Apparently, the Chinese government has encountered a paradox in addressing the country’s financial problems. Measures intended to prevent a financial crisis resulting from the overheated property market of high debt levels may in fact trigger the very financial crisis it means to
As land grant fees account for a considerable portion of provincial and local government revenue, curbing real estate development would put their solvency at further risk. The same paradox also exists regarding China’s monetary policy. It has long been argued that in order to reduce the leverage level, China needs to adopt a more conservative monetary policy.
Zhou Xiaochuan, governor of the People’s Bank of China (PBoC), China’s central bank, said in late 2017 that the constant calls from local governments for an easier money supply and looser monetary policies are the root cause of the country’s financial fragility. But on July 4, after the government’s attempts to tighten monetary policy led to a shortage of liquidity, the central bank had to resort again to loosening monetary policy by lowering the reserve requirement ratio for banks, less than two months after the last such move.
The decision-makers’ frustration may have sparked the recent finger-pointing between the central bank and the Ministry of Finance, a rare phenomenon in China’s political culture. In an article published on July 13, Xu Zhong, research head of the PBoC, openly criticized the Finance Ministry for its failure to implement an active fiscal policy and to effectively regulate the financial behavior of provincial and local authorities, which led to and exacerbated the debt problem.
In response, an unnamed official from the finance authority refuted the idea in a commentary that State-owned financial institutions do not contain authentic data and have acted as a “collaborator” or “accomplice” in the local debt chaos.
The dispute may be a dangerous sign that the authorities have run out of tools to address China’s financial problems. To resolve the paradox, the Chinese government must sort out its policy priorities and take a more systemic approach to better synchronize its fiscal and monetary policies, and the policy practices at the central, provincial and local level.
As the impact of the trade war with the US will continue to echo over the rest of the year, failure to do so would put the Chinese economy at greater risk in the coming months.