China has again announced fast growth with low inflation. But persistent imbalances within the economy are no smaller and may be worsening. Growth, while still strong, is waning as the stimulus disappears.
Fixed-asset investment rose 25 percent to near $1.68 trillion—equal to almost two thirds of GDP, a ratio that climbs as the year goes on. Retail sales—the official benchmark for consumption—gained 18 percent to reach $920 billion. The gap between the sizes of investment and of consumption in the first half has ballooned more than $750 billion. Stimulus was investment-driven and worsened this imbalance. There are also powerful reasons at the sector level to worry about comparatively inadequate consumption, despite its robust growth.
Areas of oversupply are well-known. Steel overcapacity is close to 250 million tons in 2010, while a retrenchment plan addresses only 25 million tons. Domestic overcapacity in cement is headed 1 billion tons this year. Consolidation of cement, autos and other industries have sputtered, as the primary goal is to enhance the position of selected state firms rather than curb capacity. Heavy industry is the top use of electricity, so it is no surprise that first-half electricity consumption rose over 21 percent—twice as fast as GDP—past 2 trillion kilowatt hours. Industrial consumption rose 24 percent and comprised three fourths of this first-half electricity use.
In the financial equivalent of overcapacity, real estate has an unsustainable role in the economy. The ratio of the housing stock as compared to GDP is higher than the United States in 2006, before the bubble burst. Yet in the first quarter of 2010, loans for property were nearly a third of total lending and growing twice as fast. For the first half, as a whole, real estate investment expanded 38 percent, easily outrunning overall investment, which was itself too rapid. The value of land purchases skyrocketed 84 percent.
While foreign attention is focused on the exchange rate and trade trends, China has finally moved toward internationalizing the renminbi. A trial program to use the Chinese currency in trade was greatly expanded. The trade program is quite substantial, but it can achieve little without a means of investing held renminbi.