The pattern of economic indicators suggests that the economy has hit the peak of the current business cycle and shows signs of a possible slump into contraction, says Zhang Bin 张斌 China Finance 40 senior researcher.
In particular, Zhang shows that
- sales growth in cyclical industries reached the current business cycle peak roughly two quarters ago and is currently trending down; for example, growth in commercial real estate sales peaked in April 2016 at 35 percent
- growth of price indicators peaked in the current cycle around the beginning of Q1 2017
- PPI growth peaked in January 2017 and is now sliding downwards
- CPI growth is also sliding downwards from its peak in Q4 2017
- production activities growth is currently at its peak
- manufacturing PMI, business activities PMI and services PMI reached 51.6, 54.6 and 53.6, respectively, all at three-year peaks
- the Keqiang index, a weighted average of industry power consumption growth rates, mid-to-long term loan balances, and rail freight, is at a six-year high
As the changes in growth rates in price indicators and production activities generally lag behind growth changes in sales and demand, the above pattern suggests a peak of economic activity and the likely beginning of contraction, argues Zhang.
According to Zhang, there is limited room to sustain economic growth at the peak level, as
- large-scale expansion in infrastructure investment is unlikely
- since 2013 infrastructure investment growth has trended down, echoing the government's reservations on overusing fiscal stimulus
- as local government revenue contracts and monetary tightening continue, infrastructure investment growth is unlikely to stay in the 17 to 20 percent range
- room for improvements in exports is still limited
Hope, says Zhang, lies in the speed at which the manufacturing sector upgrades and substitutes imports for self-manufactured products. A sign of accelerating industrial upgrading is that R&D expenditure and the number of patented inventions have increased substantially, and that the value-added in China's exports has increased, adds Zhang.