On April 16, the National Bureau of Statistics of the Communist Party of China (NBSC) released economic data for the first quarter of this year, with the mainland’s gross domestic product (GDP) growing by 18.3% on a preliminary basis. According to some analysts, the figures are not only lower than market expectations, but also there is a great deal of uncertainty about their sustainability. With the “credit-investment-debt” drive, the CCP’s GDP is a waste of resources and a huge financial risk.
The National Bureau of Statistics (NBS) of the Communist Party of China (CPC) announced on 16 February that the preliminary GDP for the first quarter of 2021 was RMB 24,931 billion, an increase of 18.3% in comparable prices compared to the first quarter of 2020. The value added of the primary sector (including agriculture, forestry, fishery and animal husbandry) was RMB 1,133.2 billion, up 8.1% year-on-year, with a two-year average growth rate of 2.3%; the value added of the secondary sector (including mining, manufacturing, electricity, gas and water production and supply, and construction) was RMB 9,262.3 billion, up 24.4% year-on-year, with a two-year average growth rate of 6.0% The value added of the tertiary sector (including services, information technology, real estate, education, healthcare, culture, tourism, etc.) was RMB 14,535.5 billion, up 15.6% year-on-year, with a two-year average growth rate of 4.7%.
In an exclusive interview with the Hong Kong Epoch Times, Hong Kong-based financial analyst Jiang Tianming said the seemingly “bright” figures do not represent the strong recovery of the Communist Party’s economy. He said, “First of all, GDP fell 6.8 percent year-on-year in the same period last year, making this year’s GDP growth calculation based on a lower value to record the highest GDP growth rate since 1992; secondly, the 18.3 percent year-on-year growth was not only lower than market expectations, but also ranked the second-lowest GDP growth in the past five years. Looking at the first quarter, there is greater uncertainty about whether the economic growth rate is sustainable.” Jiang Tianming added that what is more noteworthy is the waste of resources and the huge financial risks behind the CCP’s economic growth driven by “credit-investment-debt”.
Lower than expected year-over-year, second-lowest year-over-year in the last five years
During the same period last year, the first quarter of 2020, the CCP economy experienced a historic contraction due to the major outbreak of CCP viruses (Wuhan virus and New Crown virus), with GDP falling 6.8% year-on-year (i.e., compared to the same period in 2019). The value added of the primary sector was RMB 1,018.6 billion, down 3.2% year-on-year; the value added of the secondary sector was RMB 7,363.8 billion, down 9.6% year-on-year; and the value added of the tertiary sector was RMB 12,268 billion, down 5.2% year-on-year.
Jiang Tianming noted that the decline in GDP in the first quarter of 2020 gave a very low base for GDP accounting in 2021, which allowed the CCP economy to post the highest year-on-year growth rate in the first quarter of the year since 1992. In other words, the bright GDP growth figure was not due to the fast growth in the first quarter of the year, but rather to the contraction in the first quarter of last year. However, the year-on-year growth rate is still lower than the market’s expectations.
According to Bloomberg, Morgan Stanley economist Deyi Tan expects China’s year-over-year growth to increase by 20% in the first quarter of 2021, while economists surveyed by The Wall StreetJ ournal expect China’s year-over-year growth to reach 19.2% in the first quarter. The Wall StreetJ ournal surveyed economists expect China to post a 19.2% first quarter growth rate. The National Bureau of Statistics of the Communist Party of China also disclosed a 10.3% increase in GDP in the first quarter of 2021 compared to the first quarter of 2019, and an average growth rate of 5% for both years (2020 and 2021). Jiang Tianming noted that 5% is the lowest quarterly growth rate in the four years from 2016 to 2019.
Li Keqiang, a member of the Standing Committee of the Political Bureau of the Communist Party of China Central Committee and Premier of the State Council, said at a video symposium hosted by some major local government officials in Nanjing on March 25 that “the situation this year is special, and the analysis of the economy should not only look at the year-on-year but also the ringgit, and the fast growth rate of some economic indicators year-on-year is largely a factor of the low base of the same period last year.”
On a ringgit basis, China’s GDP grew by 0.6 percent in the first quarter of 2021 compared with the fourth quarter of 2020. Jiang Tianming pointed out that the ringgit here refers to the comparison with the previous quarter, that is, the first quarter of 2021 compared with the fourth quarter of 2020. the ringgit GDP growth rate in the first quarter of 2021 ranked the second lowest among the past 21 quarters (2016 to the first quarter of 2021), while the first quarter of 2020 ranked the lowest, with a 9.3% drop in GDP ringgit. Also, the first quarter of 2021 GDP growth rate YoY is significantly lower than the 1.6% in the first quarter of 2016, 1.8% in the first quarter of 2017, 1.9% in 2018 and 1.8% in 2019. This indicates sluggish economic growth.
Will the economic growth rate be sustainable in the first quarter?
On April 12, 2021, the People’s Bank of China held a press conference on financial statistics for the first quarter of 2021, announcing the most important indicators of China’s macroeconomy – social financing scale and broad money M2. These two indicators are leading indicators and directly affect the future performance of the real economy.
At the end of March, China’s social financing scale stock stood at 294.55 trillion yuan, up 12.3% year-on-year, 1 percentage point lower than at the end of February, and also below 13% for the first time in nearly eight months. The balance of broad money M2 at the end of March was 227.65 trillion yuan, up 9.4% year-on-year, a growth rate 0.7 percentage points lower than at the end of February.
YouTuber Masked Finance said on his show that the growth rate of social financing scale has basically declined month by month after peaking at 13.7% in November 2020. Broad money M2 has also essentially declined from last year’s record highs. This indicates that demand is declining, as it is behind money.
The scale of social financing refers to the total amount of funds received by the real economy from the financial system, which includes banks, securities, insurance and other financial institutions, as well as the bond market, stock market, insurance market and intermediary business market, etc. The broad money supply (M2) refers to the cash circulating outside the banking system plus corporate deposits, residential savings deposits and other deposits, which includes all forms of money that may become real purchasing power.
The former director of the Department of Investigation and Statistics of the People’s Bank of China has written that the scale of social financing and broad money (M2) are equivalent to two sides of the same coin, but the perspective and scope of the two statistics are different.
The scale of social financing comes from the asset side of financial institutions, which stands on the financing side of enterprises, residents and government to see the financing demand of the real economy. The social financing scale deducts the financial system’s internal capital transactions and simply reflects the financial system’s financial support to the real economy’s economy. In contrast, broad money M2 comes from the liability side of financial institutions, including both corporate and personal deposits, as well as deposits by non-depository financial institutions at depository financial institutions. m2 tracks the rate of social money supply.
The scale of social financing also includes a broader scope than broad money M2. Social financing scale includes not only bank deposits and off-balance sheet financing, but also bond financing and equity financing. M2, on the other hand, only includes the banking system, but does not include the bond financing and equity financing components. It can be said that the scale of social financing is more closely related to the real economy than M2.
In the 2021 CPC government work report, Li Keqiang noted that “the growth rate of money supply and social financing scale basically matched the nominal economic growth rate.” The same sentence also appears in the (Draft) Outline of the 14th Five-Year Plan and 2035 Vision for the National Economic and Social Development of the People’s Republic of China. This shows that broad money M2 and social financing scale have a close relationship with GDP. The drop in the growth rate of social financing scale and broad money M2 also sends a signal to the market that the GDP growth rate in the first quarter of 2021 is likely to be unsustainable.
Behind GDP is a waste of resources and huge financial risks
Among the three driving forces (investment, consumption and export) that drive the CCP’s economic development, investment plays a pivotal role. According to CEIC data, China’s investment accounted for a whopping 43% of its GDP in 2019. Although China ranks second in the world in terms of total GDP, the role of investment in the Chinese economy far exceeds that of other countries in the world’s top 10.
Jiang Tianming points out that the CCP has long relied on investment to drive economic growth, even though the projects it invests in do not have market demand and have very low profitability. That’s why we see a large number of vacant houses and overcapacity in numerous industries in China. This brings with it a huge waste of resources as well as financial risks. This is because these investments are based on credit expansion, which means that they are financed mainly by raising debt.
Haitong Securities in one of its macro research reports, “How to allocate investment under credit expansion from history? –In the past 20 years, China has experienced four rounds of credit expansion. If we measure the economic development by the growth rate of electricity generation, China’s economic growth rate was pulled up in the four credit expansions from ’06 to ’07, ’08 to ’10, ’12 to ’13 and ’15 to ’17.
But on the other hand, the credit expansion also allowed the Chinese Communist economy to accumulate a large amount of debt. According to the International Institute of Finance (IIF), as of the third quarter of 2020, China’s debt had accumulated to 335% of GDP, or 3.35 times the GDP, meaning that for every dollar of GDP generated, three dollars of debt was incurred.
At present, mainland China, whether it is real estate, state-owned enterprises, local governments, or financial institutions have all exploded into serious debt problems. 2020 February, Beifang Founder bonds defaulted; November, Henan Yong Coal, Brilliance Auto, and Tsinghua Ziguang, in succession, defaulted on their debts. 2021 March, Hebei State-owned Jizhong Energy, wholly owned by the State-owned Assets Supervision and Administration Commission of Hebei Province, technically defaulted, Chongqing Energy, 100% owned by Chongqing State-owned Assets Supervision and Administration Commission had a bank note default, and real estate development company Huaxia Happiness was in debt distress; in April 2021, China Huarong, which is largely owned by the Ministry of Finance of the Communist Party of China, was caught in a bond default fiasco, with bond prices plummeting. As a large financial holding group with high systemic importance, Huarong’s “black hole of risk” will have a huge impact on the CCP’s financial system.
According to Jiang Tianming, too many companies in China cannot repay their debts with cash generated from their own operations and rely mainly on “refinancing”, that is, borrowing money to pay off their debts. And with the accumulation of interest will further push up the debt.
Jiang Tianming said, “Success is also Xiao He, failure is also Xiao He”, the Chinese Communist Party, through incessant borrowing, has blown up the world’s second largest economy, and kept announcing the “bright” GDP growth rate, but the debt behind the GDP is like a bomb, threatening the stability of the financial system of the Chinese Communist Party at any time. However, the debt behind the GDP is like a bomb that threatens the stability of the CCP’s financial system.
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