China's Slowdown Continues

The news that economic growth in China slowed to its lowest level in 25 years in 2015 came as a surprise to no one, given the turmoil that has surrounded the Chinese economy over the past year.  Nevertheless, this sub-7% GDP growth rate was a stark reminder that the days of consistent economic growth rates of near 10% are over and that the Chinese economy is entering a new era.  Moreover, few economists believe that the Chinese economy actually grew by 6.9% in 2015, as a host of more verifiable data suggests that last year’s economic growth rate in China was likely somewhere between 3% and 5%.  Despite this slowdown, a collapse of the Chinese economy remains highly unlikely, although some sectors of the economy are clearly in decline.  What is happening is that a major change in the structure of the Chinese economy is causing turmoil in many of the sectors that had once been the key drivers of growth in China.  However, other sectors of the Chinese economy are continuing to grow at a healthy pace.

As expected, the Chinese economy expanded (officially) at a rate of 6.8% on a year-on-year basis in the fourth quarter of 2015, down from the 7.0% GDP growth rates in the first half of 2015 and the 6.9% growth rate in the third quarter.  Much of this decline can be attributed to the struggles of China’s export-oriented manufacturing sectors, which have been hit by a loss of export competitiveness in China and the weakness of many of China’s key export markets.  Moreover, China’s property market also remained weak, adding further pressure on the economy.  On the bright side, consumer spending in China continued to grow at a strong pace in recent months, with retail sales growth exceeding 11% in the fourth quarter of last year.  Moreover, stronger housing sales suggest that China’s beleaguered real estate sector is in the midst of a recovery, despite the recent market turmoil in that country.  Overall, while China’s economy is undoubtedly in the midst of a slowdown, its performance last year was far better than that of most of its leading rivals (with the notable exception of India) and despite its troubles, China remains a key driver of global economic growth.

As we have suggested many times in recent years, the Chinese economy is undergoing a major transition away from its dependence upon manufactured exports for its economic growth, to an economy that is increasingly driven by the spending of Chinese consumers.  It was inevitable that 30+ years of 10% economic growth rates would eventually erode China’s export competitiveness as labor and other production-related costs rose sharply during that period.  Moreover, there was no way in which the Chinese government could continue to increase its investment spending at record-level rates, taking away another pillar of China’s economic miracle.  Instead, as wealth levels have risen dramatically in recent decades, large upper and middle classes have emerged in China, leading to major increases in consumer spending that have continued despite the recent economic slowdown.  As such, China is assuming its role as a more mature, more developed economy and this means that consumer spending and technological development will play an ever-greater role in China’s economic future.

This transition will undoubtedly prove painful for many sectors of the Chinese economy and will likely continue to drive market turmoil in China as many of these key sectors struggle with the new realities facing the Chinese economy.  Moreover, growth rates are expected to continue to trend downwards in the coming years, with GDP growth likely to fall to 6.5% in 2016 and to below 6% before the end of this decade.  Over the longer-term, economic growth rates of between 4% and 5% will become the norm in China, and given the fact that population growth is slowing dramatically, such growth rates will continue to lift wealth levels and living standards for much of China’s huge population.  While the exporters of commodities to China that have benefitted from the tremendous growth in China’s manufacturing sector over the past 35 years will no longer benefit from soaring demand levels in that country, exporters of consumer goods and services will continue to realize major gains in China as consumer spending levels there will continue to outpace those of most other large markets in the coming decades.  Altogether, China will increasingly begin to look more like the world’s developed markets in the coming decades, a transition that will have major consequences for the global economy.