All signs point to a Chinese economy that is gradually losing momentum – and that’s reason enough to celebrate.
Manufacturing activity as measured in a preliminary index created by HSBC fell in December from a month earlier. In November, industrial production slowed to year-on-year 10% growth from 10.3% the month before. Fixed-asset investment, a gauge for government spending, slipped to 19.9% growth year-on-year from 20.1% the month prior.
The figures weren’t all bad. Exports growth expanded by 12.7%, up from a forecasted 7.4%, although an inflow of hot money likely inflated the number. Many of those export dollars might not be exports at all, but rather Chinese goods shipped from Hong Kong to a mainland port.
That the economy is slowing should not be a major concern. China enacted a “targeted stimulus” in July to push the country through a rough period and its effects are now easing off, as intended.
Growth appeared to slow in the second quarter of the year, prompting China’s new administration to spend its way out of a premature slowdown. Leaders injected money into sectors such as renewable energy and telecommunications, hoping it would translate into slightly higher growth at least until November, when the communist party held its grand policy summit, the Third Plenum.
The ripple in growth, which boosted third-quarter GDP to 7.8%, helped party chief Xi Jinping and Premier Li Keqiang stave off criticism for their economic agenda. That success was evidenced by a fast-moving reform plan issued after the Third Plenum. It’s also Likonomics 101 – that is, the strategy, named after Premier Li, which requires stable GDP growth and a simultaneous rollout of reform.
Not only are analysts unfazed by the moderation in some of China’s growth indicators, many welcome it as a jumping off point for real reform. “We think the strong growth rebound since July has run its course as the government shifts its focus from ‘stabilizing growth’ to ‘adjusting structure and promoting reform’ in 2014,” Barclays economists said in a note last week.
A shift in China’s investment-driven economic model would be timely, if not urgently needed.
At the end of 2012, the debt-to-GDP ratio stood at 205-215%, no doubt high but a level many analysts say is sustainable. However, if China maintains annual growth above 7%, that ratio will hit 245% within two years, according to CLSA Asia-Pacific Markets, heightening financial risk.
A high debt ratio isn’t necessarily bad, as long as the country is getting a decent return on the debt. It no longer is. China must borrow more and invest more in order to get the same return it did on projects just a few years ago. Even Xi Jinping has recognized that the world’s second-largest economy cannot continue to rely primarily on debt-fueled investment to prop up GDP figures.
That’s why data points like growth in disposable income are becoming more important when measuring overall development. As China weans itself off investment, more attention will now turn to domestic consumption as a meter for growth, instead of standard go-to metrics such as fixed-asset investment.
The most recent data on this side of the spectrum are positive. Disposable income in urban households increased 7.3% year-on-year in the third quarter after slowing to 6.4% in the second. Urban household consumption picked up to 5.6% annual expansion between July and September after slowing to 4.6% in the second quarter. Retail sales growth hit an 11-month high in November.
These figures will help to ease a slowdown while investment-driven growth cools. Nevertheless, domestic consumption is still a long way off from powering China’s economy; in fact, it was still moving in the wrong direction during the first half of the year.
Domestic consumption accounted for 45.2% of China’s GDP in the first six months of 2013, quite a tumble from above 60% a year earlier. At the same time, domestic investment climbed from 51% to 53% during the same period.
Overall, slowing growth means lightening the investment side of that figure while recovering some of those percentage points in the name of domestic consumption. If that’s the direction China is setting its course for, declining growth in GDP is cause for celebration.