China’s drive to slash excess industrial capacity in industries from steel to aluminum is bearing fruit, helping expectations for factory inflation jump to the highest in eight months in August.
That’s driving stronger nominal output and higher corporate profits -- and it isn’t bad for the global economy and its sluggish price growth either. But it comes with a whiff of China’s old investment-driven growth model as large, inefficient enterprises benefit more than small, dynamic ones.
Some economists argue that the unexpectedly strong expansion this year is the beginning of a "new cycle" of expansion that’s being underpinned by the capacity cuts. The counterargument is this: Investment-driven, debt-fueled growth to ensure robust expansion ahead of a Communist Party leadership reshuffle in the autumn is a key driver of rising prices -- and it’s unsustainable.
"Reduced slack and higher prices are certainly a positive," said Tom Orlik, Bloomberg Intelligence’s chief Asia economist in Beijing. "At the same time, it seems clear that a pickup in global demand boosting exports, buoyant household loans driving real estate, and a massive off-balance sheet fiscal stimulus driving infrastructure spending are the main causes of China’s growth."
