The quality of Chinese growth is deteriorating

CHINA FINANCIAL - Report 20 May 2022 by Michael Pettis

Special points to highlight in this issue:

* This week’s data release by the National Bureau of Statistics was expected to be bad, but in fact was worse than expected. For me the most worrying number is the 8.2 percentage-point gap between April’s year-on-year decline in retail sales and the decline in industrial production.

* Based on this month’s data, and on reasonable expectations that adverse conditions will continue at least into May, most analysts expect growth this year to be much lower than the 5.5 percent targeted by Beijing. They are almost certainly right, although I think they may be exaggerating the extent of the slowdown.

* For me the real problem is not the extent to which Beijing misses the GDP growth target. The real problem is the composition of this year’s growth. Any hope of a partial rebalancing this year towards more “high-quality” growth – e.g., growth in consumption, business investment and exports – has been thoroughly dashed. The only way Beijing can prevent growth from dropping to below 4 percent, or even 3 percent, is by unleashing a major new wave of infrastructure spending. This means, of course, that China’s debt-to-GDP ratio is likely to rise a great deal this year.

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