In China, they do things a bit differently. That goes for the Chinese economy as well. During the last two years year-on-year GDP growth ‘fluctuated’ between the 6.7% and 7.0%. So basically, Chinese growth is both very high and very stable. Uncertainty in this centrally planned economy is absent!
If only this was true. As we know for a while now, Chinese growth numbers should be taken with a grain of salt. Questions about the health of China’s economy are abundant. In fact, the graph below shows that the uncertainty about economic policy has risen to the highest level in over 20 years. The graph shows the Economic Policy Uncertainty Index, which, exactly like its name suggests, measures the uncertainty surrounding economic policy making. To determine the level of the index, its creators Baker, Bloom and Davis, look at the ‘disagreement’ among economic forecasters on the Chinese economy, but also at the number of news articles discussing economic policy uncertainty. While this may sound a bit awkward, incorporating anecdotal evidence is especially valuable for countries where officially reported economic data are a bit dodgy.
Last year the number of newspaper articles covering economic policy uncertainty has exploded, resulting in a quintupling of the Economic Policy Uncertainty Index. Economic uncertainty in China is now higher than in Italy, certainly no role model when it comes to stability. Hence, China’s rigged GDP numbers disguise a massive rise in uncertainty about the economy going forward. But what caused this? In one word, ‘debt.’ China’s economic model is based on debt. The Chinese government uses loans, especially in the corporate sector, as a throttle to control the speed of the economy. But in recent years the government is in ‘wide open throttle’ mode. In seven out of the last eight years credit growth has outpaced economic growth, and in some cases by a fairly wide margin. Ever more debt has to be put to work to maintain the high growth numbers.
But this credit-driven growth model has its limitations. China debt-to-GDP level has almost doubled to 300%, since the beginning of the millennium. That’s pretty extreme, even for a fast-growing economy like China. And that brings us back to the Economic Policy Uncertainty Index shown in the first chart. The fact that China has reached the boundaries of its debt-fueled economy is raising doubts about what’s next. A lack of alternative growth engines also gives uncertainty about when and by how much the Chinese economy will slow. The government strives for roughly a half percent each year, but it’s far from clear how it wants to realize this. Therefore, economic uncertainty has skyrocketed. Perhaps one last positive remark. China is the uncrowned champion of kicking the can down the road.
“Measuring Economic Policy Uncertainty” by Scott Baker, Nicholas Bloom and Steven J. Davis”, 2016