China Rebalancing Update – Q4 2014
With all the relevant economic data out, we can now update our rebalancing indicators for the fourth quarter of 2014:
- Disposable Income Growing Faster than Per Capita GDP
We have revised our benchmark to take population growth into account with real per capita GDP growth rather than just looking at real GDP growth. We have also revised our disposable income growth indicator to take into account rural consumption – about one-third of total household consumption. The new indicator is the average of urban and rural per capita disposable income growth weighted by urban and rural shares of total household consumption. As a result of these adjustments, our grade on this indicator has changed from slightly negative to slightly positive. Real national disposable income per capita has outpaced GDP since the beginning of 2013. In 2014, real disposable income per capita grew by 7.3 percent compared with real per capita GDP growth of 6.9 percent.
Indicator = Slightly Positive (4/5)
Figure 1 Per Capita GDP and disposable income percent growth, year over year (ytd.)
- Positive Real Interest Rates on Deposits
The real deposit rate improved greatly in 2014 compared with 2013, rising from an average 0.62 percent to 1.25 in 2014. However, as we noted in earlier posts, this increase is due to a slowdown in consumer prices not a change in the benchmark deposit rate. Indeed the net effect of the rate decrease and incremental liberalization of the ceiling announced in November was zero. After reform the effective ceiling on one-year deposit rates remains unchanged at 3.3 percent.
Indicator = Slightly Positive (4/5)
Figure 2 Real interest rate on one-year deposits
- Housing Investment Growth Continues to Slow but Still Faster than GDP
Although the slowdown in residential real estate investment is a concern to some because of its impact on GDP Growth, it is a positive indicator for rebalancing. Residential real estate investment growth slowed to 9.2 in 2014, half the growth rate of one year earlier. In the fourth quarter alone, accumulated growth year-to-date slowed by 210 basis points compared with the accumulated growth of the third quarter.
Indicator = Neutral (2/5)
Figure 3 GDP and residential real estate investment percent growth, year over year (ytd.)
- Loans to Small Enterprises Growing Faster than Large Enterprise Loans
Small enterprise loans continue to grow faster than large and medium-sized enterprises. The year-over-year growth rate of loans to small enterprises accelerated in the fourth quarter of 2014, rising to 15.5 percent from 13.5 percent in the previous quarter. This pace is even faster than small enterprise loan growth in the fourth quarter of 2013. This is a good sign that targeted measures to support small enterprises could be having an immediate impact.
Indicator = Positive (5/5)
Figure 4 Growth in Enterprise Loans by Size, year over year (ytd.)
- Growth of the Tertiary Sector Faster than the Secondary Sector
The gap between the growth of the tertiary sector and secondary industry expanded in 2014 and is now double that of one year earlier, and triple that of two years earlier. In the fourth quarter, the growth rate of the secondary industry sector (manufacturing and construction) decelerated by 10 basis points while the growth rate of the tertiary sector (service sector) accelerated by 20 basis points. The growth rate of tertiary sector exceeded secondary industry for the first time in 2012 and since continues to be a bright spot in the rebalancing story.
Indicator = Positive (4/5)
Figure 5 Secondary and tertiary sector percent growth, year over year (ytd.)
Overall: The prospects for economic rebalancing in China remain slightly positive in the fourth quarter of 2014. Overall China looks better on track for rebalancing this year than last year, with the trend moving higher in the slightly positive category in 2014. Most of the improvement this year is coming from residential real estate investment growth, now half the growth rate of 2013 and one-third the growth rate of four years ago. Real estate is a major contributor to China’s investment led growth model, if this slowdown continues this will continue to be positive for rebalancing.
Overall Grade = (19/25) Slightly Positive
Note: prior period grades have also been revised in line with our change in methodology for measuring household consumption growth.