Growth is the Least of China's Big Three Worries

Agenda-Setting Financial Insight.
April 13 2012 11:32 AM

Growth is the Least of China's Big Three Worries

China’s GDP grew by 8.1 percent in the first quarter of 2012, year on year, according to the National Bureau of Statistics, the slowest pace in nearly three years.

Photo by SAEED KHAN/AFP/Getty Images

China’s present condition can’t be summed up in a few tenths of a percentage point. True, judged by the headlines, GDP growth of 8.1 percent in the first quarter of 2012 was a miss. Economists polled by Reuters expected 8.3 percent. Investors shouldn’t overthink it: growth is the least of China’s three big worries.

The slowdown is real, but well flagged. Premier Wen Jiabao set a target of 7.5 percent GDP growth for 2012, compared with last year’s realised 9.2 percent. Against that, the current reading is hardly shabby, and may improve. Getting banks to lend more is one recourse that has already begun, with loans reaching 1 trillion yuan in March. There are signs things are already ticking up - such as the inching up of electrical production in March, often touted as a “more reliable” measure of growth than GDP.


If investors want to worry about something, they should start with politics. The mysterious ouster of high-profile Chongqing party chief Bo Xilai, and the arrest of his wife on murder charges, suggests a rising political risk premium as China nears next year’s leadership change. There’s no sign of a political breakdown, but increased anxiety at the top could slow big reforms on major issues such as opening up restricted investment sectors or liberalising interest rates.

Fretters should also have an eye on the financial system. As with GDP, numbers mislead. China’s banks reported non-performing loans of just over 1 percent of their total books in 2011. But that’s unsustainable, even if accurate. The banking system is built on distortions that promote misallocation of capital, with lending guided more by policy, collateral levels and implicit government guarantees than by considerations of risk and return.

Not that GDP growth won’t present China with some thorny issues in 2012. Policymakers will soon have to decide, for example, whether they are happy to tolerate the inflationary pressures that come with using bank lending to stimulate the economy. And a political or financial shock would quickly make itself felt in the GDP figures. But the more complex China’s situation gets, the less useful one big number becomes.

 Read more at Reuters Breakingviews.

John Foley is breakingviews' Greater China correspondent, based in Hong Kong. He previously wrote on mergers and acquisitions, capital markets, consumer goods, mining, and luxury.


Sports Nut

Grandmaster Clash

One of the most amazing feats in chess history just happened, and no one noticed.

The Extraordinary Amicus Brief That Attempts to Explain the Wu-Tang Clan to the Supreme Court Justices

Amazon Is Officially a Gadget Company. Here Are Its Six New Devices.

Do the Celebrities Whose Nude Photos Were Stolen Have a Case Against Apple?

The NFL Explains How It Sees “the Role of the Female”

Future Tense

Amazon Is Now a Gadget Company


How to Order Chinese Food

First, stop thinking of it as “Chinese food.”

Scotland Is Inspiring Secessionists Across America

The Country Where Women Aren’t Allowed to Work Once They’re 36 Weeks’ Pregnant

The XX Factor
Sept. 18 2014 11:40 AM The Country Where Women Aren’t Allowed to Work Once They’re 36 Weeks’ Pregnant
Sept. 17 2014 5:10 PM The Most Awkward Scenario in Which a Man Can Hold a Door for a Woman
  News & Politics
Sept. 18 2014 3:19 PM In Defense of Congress Leaving Town Without a New War Vote
Sept. 18 2014 6:02 PM A Chinese Company Just Announced the Biggest IPO in U.S. History
Sept. 18 2014 4:15 PM Reactions to a Sketch of Chelsea Manning Reveal Transmisogyny
  Double X
The XX Factor
Sept. 18 2014 3:30 PM How Crisis Pregnancy Centers Trick Women
  Slate Plus
Behind the Scenes
Sept. 18 2014 1:23 PM “It’s Not Every Day That You Can Beat the World Champion” An exclusive interview with chess grandmaster Fabiano Caruana.
Brow Beat
Sept. 18 2014 4:33 PM The Top 5 Dadsplaining Moments From The Cosby Show
Future Tense
Sept. 18 2014 5:43 PM Oracle’s Larry Ellison Steps Down, Will Be Replaced by Hurd’n’Catz
  Health & Science
Sept. 18 2014 3:35 PM Do People Still Die of Rabies? And how do you know if an animal is rabid?
Sports Nut
Sept. 18 2014 11:42 AM Grandmaster Clash One of the most amazing feats in chess history just happened, and no one noticed.