China Research

Economic growth in China has been declining visibly in the past few years. Looking more deeply into the structural problems of China, a further downsizing of GDP growth seems unavoidable on trend – despite the latest stimulation and rescue measures.

Structural issues more important than short-term statistics

Financial markets are short-term minded by nature. For this reason, Chinese short-term numbers cause a lot of global attention, too – more than they deserve per se. Nobody can sufficiently judge the correctness of official Chinese statistics for GDP, inflation, urban unemployment, the PMIs, bad or non-performing loans, etc.  

Thus, it also seems impossible to come to a conclusion on the efficiency of the recently announced two financial support packages of enormous 10 trillion RMB totally (6 plus 4 trillion which means in USD 838 billion for  2024-2026 and USD 539 billion for five years to come; in Swedish about USD 838 miljarder plus 539 miljarder). According to IMF sources, “hidden local debt” may amount to as much as totally 60 trillion RMB – an amount that would be far away from tranquillizing – and very contrary to what China’s minister of finance the other day described as “controllable” (more on the topic and definition of  “hidden debt” and China’s scaring total domestic debt situation in one of my forthcoming blogs).

The size of this latest government action indicates that Chinese political leaders now have become really worried about the local debt issue – but the real magnitude of these problems remains uncertain due to the unknown true dimension of the total provincial and local indebtedness.

Again, the institutional factor of poor transparency remains as one of China’s major shortcomings – and China’s recent policy reaction against overwhelming local debt came very late also in this special context.

As a matter of fact, the local debt problem is not new. Already in 2013, I published an article on this topic though local debt in China was not really addressed as important by the international analyst community at the time (https://publications.bof.fi/bitstream/handle/10024/44981/172270.pdf?sequence=1&isAllowed=y). It became indeed more obvious for a broader scale of (Western) analysts first more recently when the signals of the bursting real estate bubble became more scaring. 

Other relevant structural issues

Apart from the debt situation, other trend or long-term issues should be far more relevant for deepening corporate analysis than purchasing manager indices and quarterly GDP figures like, for example, economic policy in general terms, the role of the market economy in official policy strategy, the vast government subsidies to SOEs, the frequent institutional shortcomings, the bursting apartment bubble, the structure and credibility of the financial system as a whole – plus last but not least the strongly shrinking population in the forthcoming decades (see about Chinese demography my articles in this blog from April 10 this year, https://blogg.lnu.se/china-research/?p=3530). 

We keep in mind: This summing up of endogenous structural risks could be extended and needs completely different analytical tools compared to the ordinary business-cycle approach.

However, the above-mentioned structural factor “stability of the financial system” should already have gained (some) strategic priority by now also by Chinese political leaders – expressed in the here described attempt to achieve a better balanced local debt structure. At the same time, we should not forget government-subsidized unprofitable production (for exports) which certainly hides further risks for non-performing bank loans. 

The uncertain issue of financial stability

All this should lead to the conclusion that the volume of bad or non-performing loans should be discussed more broadly than it still is the case when official Chinese publications and comments have been published. 

Altogether, China must work very hard to avoid a future financial explosion. Consequently, China may also be the biggest single financial threat to global financial markets at some point in the future. It is late for China to decrease risks – but (hopefully) not too late. 

The number of Chinese medium- and long-term challenges could, of course, be extended further. Many obstacles still have to be tackled – either decreased or eroded.

We know that the quality of Chinese statistics has been underperforming for a long time, particularly as regards GDP. And there is no evidence that things have improved during the ongoing crisis – or whatever China’s growth problems may be called. Here we have one of the reasons why financial markets should not overestimate the role of business cycle analysis on China.

Even BOFIT – the specialized research institute of the Finnish central bank Suomen Pankki – wrote in its latest forecast on the Chinese economy that “BOFIT’s alternative calculation of Chinese GDP suggests real growth might have been considerably lower” (add: in the third quarter 2024).

According to BOFIT, China’s GDP will grow by around 4 percent in 2024, and when considering the latest stimuli by 3.5 percent in 2025. Since BOFIT rather estimates growth numbers than predicts precisely – which makes a lot of sense – the outlook for 2026 shows an estimated GDP growth of roughly 3 percent (https://www.bofit.fi/en/forecasting/latest-forecast-for-china/). 

3 percent is also the size of BOFIT’s currently estimated potential growth rate for China. Nobody knows about this exactly – but I wouldn’t go higher myself.

Certainly not before I get a more secure feeling that transparency finally is improving.

Hubert Fromlet
Affiliate Professor at the School of Business and Economics, Linnaeus University