China's growth rate
They say 9%; we say less than 5%
It is time to take a red pencil to China's charts and tables of high economic growth. It is growing, they insist, at a clip of 9%. Non-stop for several years. Spectacular is too soft a word to describe the show. Where does its elixir come from?
The question spawns more questions and no answers. How does the country use its capital? What shape its corporates and banks? Could we take at face value the ever so many testimonials it has started collecting from international agencies.
First the corporates. They make huge profits and record exponential growth in numbers. We are told that the investments come from retained earnings. By no standard, China's corporate savings do not add up to so much. The investments are traced to bank loans. The clue is in the credit deposit ratio, which remains constant at 150% for years.
It is because of large-scale conversion of loans into equity. Then also consider the billions of Yuan with the state owned reconstruction companies. The amount so transferred works out to a fifth of the country's GDP.
To write off its bad loans China's banking system needs a trillion dollars in re-capitalisation. That also is equal to 40% of its GDP. Of late, however, the bad loans are seen to be falling. How? Simple; the bad loans were removed from the bank's portfolio. There was also heavy capital injection.
How far profitable the Chinese companies? They make 25% net profit for the past seven years. Fantastic. But it is the aggregate of the profits from a rising number of companies. China had 1.5 lakh companies seven years ago. Now it has 2.5 lakh companies. Massive investments keep the ball rolling. The manufacturing sector accounts for 55% of China's GDP.
Let us come to the barometer of efficiency: the return on capital. For some time it has grossed 3.8%. Agreed the net margin is up by 0.50%, the boost accounted for by the frequent cut in interest rates and nothing else. Similarly the net return on banking asset in China is barely 0.41%, lowest in Asia, where the average is below 1.2%.
The moral of the story is that there is little real water in China's declared growth. It is just a tortoise on the move while the hare is not sleeping. At best it grows at 5% or even less. For other negative factors, including environmental damage, are yet to be factored in. So there is no miracle to mesmerise us.
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