Is China Avoiding a Major Economic Slowdown?

As expected, economic growth in China continued to slow in the first quarter of this year, although due to the murky nature of the economic data coming out of that country, it is difficult to discern exactly how well the Chinese economy is faring.  On one side, a number of signs suggest that the Chinese economic slowdown is much worse than Beijing will admit, with most economists believing that the actual rate of economic growth in China is just half of what the official data indicates.  However, other data released in recent weeks suggests that the slowdown in China may be abating and that the Chinese economy could successfully avoid the dreaded hard landing that many have feared.  Regardless of the data, it is clear that the next few months will go a long way towards determining how the Chinese economy weathers this current storm.  Much will be determined by the levels of confidence that businesses, investors and, most importantly, consumers have in the Chinese economy in the months ahead.

China’s official rate of economic growth in the first quarter of 2016 was 6.7% on a year-on-year basis, conveniently within Beijing’s target range of 6.5% to 7.0%.  However, Chinese economic growth rates have long been considered highly suspect and the subsequent release of a 1.1% quarter-on-quarter GDP growth rate for the first three months of this year raised more questions than it answered, and further discredited China’s year-on-year figures.  One particular cause for concern is the fact that much of China’s growth in early 2016 was driven by debt, which boosted business investment levels as well as China’s real estate market.  Clearly, these are two sectors of the Chinese economy that have the potential for a major downturn and are unlikely to be able to maintain sustained growth in the years ahead.  Meanwhile, Chinese export industries continued to struggle, although exporters did manage to record growth in March after a very poor start to the year.

Given the questionable nature of Chinese economic growth data, economists continue to look for clues among other data released by Beijing in a bid to understand which direction the Chinese economy is headed.  One source of more reliable data can be found in China’s import and export results and here, the data is both raising concerns about the state of the Chinese economy, while providing hope that the worst is over.  For example, the overall level of Chinese imports and exports fell by 11.3% in the first quarter of this year, but March’s trade data was a big improvement over that from the first two months of this year.  Likewise, industrial production continued to rise at a steady pace, while retail sales growth remained above 10% last month.  One statistic that often gives an accurate representation of the health of the Chinese economy is electricity consumption, and here, growth was 3.2% year-on-year in the first quarter, a relatively low figure but one that is higher than that of 2015, when electricity consumption was flat.  Altogether, it is clear that the economic slowdown in China has been worse than Beijing will admit, although there are some signs that this slowdown may be abating.

In order to ensure that this economic slowdown does not worsen and result is a serious hard landing for the Chinese economy, a number of things need to go right.  First, Chinese consumer spending needs to remain strong as it is clear that the Chinese economy is in the midst of a rebalancing that is reducing the importance of low-cost manufactured exports and increasing the role played by domestic consumer spending.  As such, maintaining high levels of consumer confidence must be Beijing’s first priority.  This will require greater transparency with regards to economic policy and data so that Chinese consumers remain confident and continue to drive double-digit retail sales growth.  Another challenge for the Chinese economy involves the development of higher-end manufactured exports, as China is rapidly losing its competitiveness vis-à-vis cheaper emerging market rivals for investment in low-cost manufacturing.  If China can manage this rebalancing, it will firmly entrench itself as a middle-income economy of great importance, and, as growth continues, many areas of the country will rise to developed economy status in the coming decades.  However, mismanaging China’s current challenges could seriously delay these developments and cause significant economic harm for hundreds of millions of people.