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With the release of fourth quarter 2012 economic data, we can give an update on the economic rebalancing in China. For an explanation of these indicators and why they are important, refer back to our original post on the topic.
1. Urban Disposable Income Growing Faster than GDP
Urban disposable income continued to grow moderately faster than GDP in the fourth quarter of 2012. We have switched to using real growth rates for both GDP and disposable income for this indicator to avoid inflation distortions. Disposable income grew at 9.6 percent, versus 7.8 percent for GDP. The gap between the two was slightly smaller than in the third quarter. This indicator remains slightly positive, and it remains to be seen whether disposable income can continue to remain ahead if GDP growth recovers.
Indicator = Slightly Positive (4/5)
Figure 1 GDP and disposable income percent growth, year over year (ytd.)
2. Positive Real Interest Rates on Deposits
Interest rates remain positive on one-year deposits, but only barely. The pickup in inflation during the fourth quarter lowered the real interest rate on one-year deposits to only 0.5 percent. As we pointed out last time, any further increase in inflation has the potential to push real interest rates back into negative territory. This indicator remains slightly positive with a strong possibility of being downgraded next quarter.
Indicator = Slightly Positive (4/5)
Figure 2 Real interest rate on one-year deposits
3. Residential Real Estate Investment Growing at a Slower Pace than GDP
Residential real estate continued to grow faster than GDP, but only slightly. This indicator remains in nominal terms because we do not have a residential real estate investment series in real terms. The gap in nominal growth rate between the two was 1.6 percent, larger than in the third quarter but still much smaller than in the past. This indicator remains neutral at this point. Any relaxation in the government housing policy could push it back into negative territory.
Indicator = Neutral (3/5)
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
Loans to small enterprises continued to grow faster than overall loans. The gap between the two, however, narrowed from 5 percent to 3.2 percent during the fourth quarter. As a result, we are downgrading this indicator to only slightly positive.
Indicator = Slightly Positive (4/5)
Figure 4 Total enterprise and small enterprise loan percent growth, year over year (ytd.)
5. Growth of the Tertiary Sector Faster than the Secondary Sector
Concerns over divergent inflation between the tertiary and secondary sector have persuaded us to switch from nominal to real growth rates. As a result, the picture changes a bit. The growth of the secondary sector has slowed significantly relative to a year ago. The tertiary sector has recovered modestly since the beginning of the year. For the year, the two sectors grew at exactly the same rate. This indicator is therefore neutral for rebalancing.
Indicator = Neutral (3/5)
Figure 5 Secondary and tertiary sector percent growth, year over year (ytd.)
Overall: The outlook for Chinese economic rebalancing has worsened modestly as compared to the third quarter. The growth of loans to small enterprises slowed slightly relative to overall enterprise loans. The tertiary sector failed to outpace the growth of the secondary sector when adjusted for inflation. Overall, things are moving in the right direction on most fronts, but at a glacial pace. The slow rate of reform is at odds with the urgent rhetoric that policymakers use when describing the necessity of economic rebalancing. The nascent recovery that appears to have taken hold in the fourth quarter will actually be detrimental to rebalancing if it relies on investment to power growth.
Overall Grade = C (18/25).
Indicator Grading Scale:
Negative = (1/5)
Slightly Negative = (2/5)
Neutral = (3/5)
Slightly Positive = (4/5)
Positive = (5/5)