Recent events have raised an alarm that China might be going into a decline. However, when you unpack the data, the signs become more reassuring for the Chinese economy.
2015 was another year of slow growth for China with economic turbulence and GDP growing at its slowest rate in 25 years at 6.9%, down from 7.3% in 2014. The world never tires of predicting when or if China is in decline. However, growth figures should be studied with a long-term view and within the context of China’s series of economic reforms initiated in November 2013.
Unpacking China’s Economic Figures
When it comes to economic development, China is well known for ‘trial and error’. “Cross the river by feeling the stones” has been China’s motto for economic reform these past four decades. China’s years of rapid (and current slowing) growth are due a growth model that needed at the time, namely one which relies on labor-intensive manufacturing and trade.
However, the growth model driven by manufacturing and construction is not sustainable: with huge environmental prices to pay, factories are left with overcapacity, and one can only build so many roads and factories.
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The deceleration is a reflection of China’s economic rebalancing that seeks to reduce its reliance on manufacturing and export and turn China into a consumption-driven and service-led economy. 2015’s growth figures showed manufacturing and construction shrunk to 6% in 2015 from 7.3% in 2014. But the service sectors grew by 8.3% in 2015, up from 7.8% in 2014, and are now accounting for 66.4% of total GDP growth in 2015.
The biggest one-day fall of the yuan since 1994 – at 1.8 percent against the dollar in August 2015 – shocked the world and was perceived as an attempt to boost trade, yet ongoing weakening global demand causes sluggish exports from China. The move is a means to pave the road for the yuan to enter the IMF’s Special Drawing Rights, which was a critical goal of the Chinese government in 2015.
The Chinese stock market crashed in July 2015, but the stock price boomed by 150 percent between mid-2014 and mid-2015 as a result of liberalization that made it easier for individuals to invest and easier for firms to offer shares. That led to the stock market being overvalued.
Growing Consumerism
While the crash created fears that China was leading the world towards another financial crisis, said fears have since moderated. Furthermore, the stock market is not closely linked to the real economy. For instance, retail sales in July 2015, although 0.1% below forecasts, rose 10.5% year on year.
The Chinese stock market grew more than 100 percent within a year from 2014 to 2015, while economic growth was the slowest in years. When GDP was growing fastest during 2010-2013, stock prices were declining.
China now has an emerging middle class that is larger than the United States’. The younger generation also has less appetite for saving than older Chinese generations. Movie box office sales saw a rise of tourist numbers and revenue increased 10% and 12% respectively from 2014, with revenue surpassing ¥4 trillion. Retail sales expanded 11.2% during a week-long Chinese New Year holiday; these all indicate stable growth in consumption. Private consumption will become an important pillar of the Chinese economy.
China’s Huge Domestic Market Remains Attractive
Since the financial crisis in 2009, many Chinese companies have been actively focusing on the growing domestic market. In Chinese, there is a saying that “a lean camel is bigger than a horse”. China is the second largest economy in the world, and its population size is three times greater than the United States, but its GDP-per-capita remains small.
The Chinese economy is still growing below its potential, and Chinese companies in the service sectors are optimistic about the ongoing transition from manufacturing to a consumption-driven economy.
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Chief Executive Officer Daniel Zhang (pictured) of e-commerce giant Alibaba said during its December 2015 earnings call that:
“Alibaba has a significant opportunity that will be achieved by the growth of the Chinese consumption economy. Specifically, we see increased consumption from—an expanding middle-class—who are undergoing lifestyle change and upgrading to higher-quality products and services—[and] young people who have a strong appetite for spending but little interest in saving compared to their parents.”
E-commerce continues to expand. China had 413 million online shoppers by the end of 2015, much higher than the total US population, but less than half of the total Chinese population.
Foreign companies, particularly from emerging industries, are still trying hard to get into the Chinese market. Netflix is engaging closely with Chinese counterparts to enter one of the fastest growing video markets in the world. Google is making its way back to China through various small joint ventures and partnerships, and Facebook CEO Mark Zuckerberg is learning Mandarin, hoping to crack the Chinese market. All this shows that China remains an attractive country for doing business.
Growth Outlook for 2016 and Beyond
2016 will continue to be a difficult year for China’s economic transition and growth rate as the coming year will continue the path of economic deceleration. The government is setting a growth target between 6.5% and 7%: the World Bank expects China to grow 6.7 percent.
The Chinese economy faces several challenges that will shape the outcome of its rebalancing efforts. Externally, the global economic environment remains unfavorable to China, with a slow recovery of the world economy and low oil prices. China will have to continue with its liberalization efforts to open up the market and reform its financial system.
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Social inequality and urban-rural inequality continue to widen. While urbanization has been ongoing for decades, the income gap is getting bigger and this is something that China will have to address to avoid social disorder. China continues to combat industrial overcapacity and expects to cut five to six million jobs in the next two to three years. China needs to deal with these laid-off workers with appropriate compensation or relocate them to prevent social unrest.
If China can handle these issues effectively, the world’s second largest economy will head towards another ten years of high, sustainable growth.
