China Rebalancing Update—Q2 2013

Nicholas Borst (Federal Reserve Bank of San Francisco)



China’s second quarter economic data has been released making it now possible to do an update on the progress economic rebalancing. For an explanation of these indicators and why they are important, refer back to our original post on the topic. Previous rebalancing updates: Q1 2013, Q4 2012, Q3 2012, Q2 2012. A chart showing all the previous rebalancing scores is available at the end of the post.

1. Urban Disposable Income Growing Faster than GDP

Urban disposable income growth continued to fall in the second quarter, mirroring the slowdown in GDP growth. Disposable income grew at 6.5 percent (down from 6.7 the previous quarter), versus 7.5 percent for GDP. The 1 percentage point gap between GDP growth and disposable income growth persisted from the previous quarter. Pressure on corporate profits is likely causing slower growth of wages and disposable income. This indicator remains slightly negative as the consumption share of GDP is likely to shrink if GDP continues to grow faster than disposable income.

Indicator = Slightly Negative (2/5)

Figure 1 GDP and disposable income percent growth, year over year (ytd.)


2. Positive Real Interest Rates on Deposits

In the second quarter real interest rates on one-year deposits barely remained positive. The one percentage point differential that existed in the second half of 2012 has shrunk to a paltry .3 percent. This continued decline in real interest rates means that this indicator is slipped from slightly positive to neutral . Despite the recent move to remove the floor on lending rates, it’s unlikely that there will be a similar step to free up deposit rates. Real interest rates therefore will remain close to zero or drop into negative territory if inflation picks up.

Indicator = Neutral (3/5)

Figure 2 Real interest rate on one-year deposits


3. Residential Real Estate Investment Growing at a Slower Pace than GDP

The growth of residential real estate investment remained high in the second quarter, outpacing GDP growth by 12 percentage points. Given the continuation of this gap, this indicator is downgraded from slightly negative to negative. This continued boom in real estate investment casts doubt on the effectiveness of government housing market controls. Given persistent reports of excess housing stock, it seems unlikely that this level of spending is justified by actual demand. China’s real estate investment relative to GDP is already high and on track to increase even further.

Indicator = Negative (1/5)

Figure 3 GDP and residential real estate investment percent growth, year over year (ytd.) 


4. Loans to Small Enterprises Growing Faster than Total Enterprise Loans

The growth rate of total enterprise loans and loans to small enterprises continued to slow in the second quarter. The gap between the two stayed relatively constant, increasing from 1.2 percentage points to 1.5 percentage points. As a result, this indicator remains slightly positive. The slow growth of total enterprise loans stands in contrast to the rapid growth of other types of social finance.

Indicator = Slightly Positive (4/5)

 Figure 4 Total enterprise and small enterprise loan percent growth, year over year (ytd.)

SE Loan and Total E Loan

5. Growth of the Tertiary Sector Faster than the Secondary Sector

While growth of the industrial sector continued to slow, the expansion of the service sector remained robust. The service sector grew 8.3 percent compared to last year, while the industrial sector grew by 7.6 percent. If these trends continue, the service sector will grow to occupy a more normal share of the overall economy. This indicator remains slightly positive.

 Indicator = Slightly Positive (4/5)

Figure 5 Secondary and tertiary sector percent growth, year over year (ytd.)


Overall: The data from the second quarter paints a depressing picture of the progress of economic rebalancing in China. The changes relative to last month have been in the wrong direction and as a result China receives its worst rebalancing score yet. If rebalancing is to be successful, policymakers will need to find ways to keep disposable growing at a healthy rate, boost deposit rates without imperiling banks, and slowdown real estate investment without crashing GDP growth. These are difficult tasks, particularly given an environment of growing domestic economic uncertainty and weak global growth.

Overall Grade = F (14/25)

Figure 6 Rebalancing Trend

Rebalancing Trend

Indicator Grading Scale:

Negative = (1/5)

Slightly Negative = (2/5)

Neutral = (3/5)

Slightly Positive = (4/5)

Positive = (5/5)

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