China’s latest GDP figures have, as expected, caused a lot of head-scratching over whether the dragon is finally running out of puff. The world’s second-largest economy grew 7.4% in the first quarter of this year, better than expected but sharply down from 7.7% in the final three months of 2013. The government expects it to grow by 7.5% this year, which would be the slowest since 1990, when the Soviet Union collapsed.
While important, GDP growth is the easy-to-understand headline figure. China’s top bods have been trying to shift people’s fixation off it, arguing for quality of growth over quantity. MT actually agrees (to an extent): more interesting is what’s driving the Chinese economy or, increasingly, failing to.
China’s stratospheric economic growth over the last few decades has been driven by exports and credit-fuelled investment. However, growth brings wage increases, meaning China is getting more expensive to make things in and companies are beginning to shift production elsewhere (some ‘reshoring’ to the UK - David Cameron’s favourite made-up word) or stay put. Exports unexpectedly fell last month and imports were also down significantly too, pointing to a broader-based slowdown.
Investment has got a bit out of hand in China, with ghost cities and bridges to nowhere sprouting up all over the place. The country invested a staggering 48% of its GDP last year. Nonetheless, as this chart shows, government investment is slowing down (although it still grew at a pretty huge 17.6%).
China fixed asset investment (exc. rural households), cumulative year-on-year % growth. Source: Bloomberg
Property is also a worry. The BBC’s Linda Yueh notes the sector makes up 16% of China’s GDP, a similar figure to countries such as Ireland before bubbles burst spectacularly. The government reining in credit should help, but it’s worth keeping an eye on.
There are signs the government’s efforts to rebalance the Chinese economy towards domestic consumption is starting to work, with retail sales rising 12.2% in the first quarter of this year.
Moreover, much has been made of China’s growth happening in its high-rise, smoggy cities, leaving behind the poorer countryside. Good news, then, that rural incomes jumped 10.1% year-on-year compared to a 7.2% rise in urban ones (although they still have a lot of catching up to do).
A very empty mall in China. Source: Wikipedia
China’s teething problems also need to be kept in perspective. This excellent article from the Economist a few weeks ago pointed out that cleaning up bad loans from the Asian financial crisis cost China 5 trillion yuan in 1998, 58% of its GDP. 5 trillion yuan is now less than 9% of GDP.
China, then, will just outgrow many of its issues. Moreover, as the Economist also noted, way more attention is paid to China than has been to other countries at its stage of development in the past. It is the world’s second biggest economy after all, but everyone got a bit hysterical when China suffered its first bond default last month. Japan had its first in the late 1990s.