The State of the Chinese Economy
Following a period of severe turbulence in previous years, the Chinese economy staged a recovery last year and outperformed all other large economies during this period. Despite the disruptions caused by the ongoing transformation of the Chinese economy and rising economic risk levels, China managed to record a higher rate of growth last year than in previous years, the first such acceleration of annual economic growth in China since 2010, the last year in which economic growth in China exceeded 10%. As such, the Chinese government will look back on 2017 as a year of recovery, as China has retaken the title of the world’s fastest-growing large economy, a title that it appeared to be resigned to losing for good not long ago. Furthermore, this growth is taking place at a time when population growth in China continues to slow dramatically, meaning that China’s per capita growth rates are rising much faster than those of other economies, allowing wealth levels in China to soar. Nevertheless, while 2017 was a better year than expected for the world’s second-largest economy, China faces many challenges in 2018 and the years thereafter, challenges that could yet derail the country’s economic expansion and modernization.
In the fourth quarter of last year, the Chinese economy expanded by 6.8% on a year-on-year basis, the same rate as in the previous quarter, thus avoiding the slight slowdown that had been expected. Once again, China’s manufacturing sector performed well, boosted by high levels of demand, both on the domestic market and in most of the country’s leading export markets. In fact, as was the case for many of the world’s largest economies, the Chinese economy clearly benefitted from the improved performance of nearly all of the world’s leading economies over the past year, as demand for Chinese manufactured goods rose considerably in recent months. At the same time, consumer spending in China remained quite strong and continued to become a more important component of economic growth in China. Altogether, the Chinese economy expanded by 6.9% for the year in 2017, an increase over the 6.7% growth rate recorded in 2016 and just the second time in the past ten years that annual economic growth in China accelerated from the previous year.
2017 provided a much-needed boost for an economy that is in the midst of a great transformation. While China’s manufacturing sector performed well last year, it is no longer the sole driver of economic growth in that country. Furthermore, export growth, while strong last year, is no longer the dominant factor in determining China’s economic well-being. At the same time, the level of investment in China, while still too high for comfort, did not rise as fast as in previous years, as fears over the threats of soaring debt levels and over-capacity forced Beijing to take steps to bring lending under control. Instead, Chinese consumers continue to become the leading driver of growth for the Chinese economy, and consumer spending remained strong in 2017. In fact, retail sales growth in China was 10.3% last year, a higher rate of growth than had been expected at the beginning of last year. In contrast, business spending began to slow over the course of last year as fears over business debt levels continued to mount.
While 2017 was a bounce-back year for the Chinese economy, 2018 appears likely to be a year of retrenchment. Now that Chinese President Xi Jinping has solidified his grip on power following last year’s Communist Party congress, he will likely be emboldened to take some painful steps that are necessary to reduce the growing risk levels facing the Chinese economy. For example, Beijing is likely to step up its efforts to bring China’s overall level of debt under control, particularly its private sector debt. As a result, a round of tightening with regards to lending to businesses and consumers is expected to take place this year, something that is likely to prove to be a drag on business and consumer spending in 2018.
In order to offset this slowdown in domestic demand growth, the Chinese government may move to allow for the yuan to weaken, particularly in response to the recent weakening of the US dollar against the yuan. This would allow for an increase in export growth at a time when demand levels remain high in most of China’s leading export markets. Nevertheless, these moves will prove to be just a temporary measure, as over the longer-term, domestic consumer spending will account for an ever-greater share of economic growth in China.
Altogether, we expect China’s official economic growth rate to fall to 6.6% in 2018 as a result of these efforts to reduce the risk levels facing the Chinese economy. Furthermore, a further slowdown to 6.3% forecast for 2019, with growth rates then settling in between 4% and 5% in the following decade. While this is a far growth from double-digit economic growth rates recorded in previous decades, it still represents a very impressive level of growth for an economy at this stage of development, particularly one with China’s demographic profile. Growth in China may slow again, but the country continues to become wealthier, and this will allow China to remain a very attractive market for businesses and investors in the years and decades to come.