China's slowing growth has a silver lining

China's GDP growth has fallen short of its official target, but it's not necessarily a cause for doom and gloom.

China’s GDP growth expanded 7.4 per cent in 2014, its slowest pace since 1990 when the Chinese government sent in tanks to clear out student protesters at Tiananmen Square. But there's no need for doom and gloom. The good news is the Chinese economy is officially in the $US10 trillion club; the only other member is the US.

Though China's GDP growth dipped below the official target of 7.5 per cent for the first time since 1998, it is still above market expectations of 7.3 per cent. The better-than-expected performance is largely due to the country’s booming services sector, which now accounts for about 50 per cent of the country’s GDP.

The contribution to GDP growth from the services sector exceeded the manufacturing sector during 2014, highlighting a positive trend towards rebalancing the economy. The outstanding growth in China’s e-commerce sector is one example of the country’s rapidly growing services economy. E-commerce retail sales in China grew 49.7 per cent last year.

E-commerce and internet-related industries are expected to become the new growth engine for China. The McKinsey Global Institute estimates the industry is expected to contribute to 7 to 22 per cent of total GDP growth from 2013 to 2025. You only need to look at Alibaba's shares to remind you of the sector’s promising future.

While we are still on the topic of sales, Chinese consumption growth also performed quite well during 2014, once again expanding at double digits. Who says the Chinese don’t consume enough? China’s consumption is, in fact, the strongest among major economies, according to International Monetary Fund. Consumption grew 10.9 per cent last year.

The strong growth in consumption is underpinned by the rapid increase in wages. Chinese real income adjusted for inflation increased 8 per cent last year and rural income grew 11.2 per cent, even faster its urban counterpart. That these wages are growing rapidly despite a slowing economy is an indication taht the country’s labour force is shrinking.

This takes us to the all-important jobs data, which is in some ways more important than the GDP growth target.  

The reason that Beijing has an official growth target is to ensure that the economy creates enough jobs every to absorb all these new jobseekers every year. People used to believe the country needed to grow at 8 per cent just to mop up these jobseekers.

In fact, the more services-oriented economy has a greater capacity to absorb jobseekers than a manufacturing-centred one. The country just added more than 10 million urban jobs last year despite a slowing economy. This is a key reason why the Chinese leadership is more tolerant of slower growth.

One of the key headwinds against the economy in 2014 was real estate investment, which has been one of the largest economic drivers in the country. Real estate investment grew 10.5 per cent, compared with 19.8 per cent in 2013. New floor space under construction declined 10.7 per cent compared with last year and sales values also dropped.

We can still expect strong headwinds against the sector this year. The market has already been spooked by a large property developer that defaulted on $SU23 million in interest payments of its offshore bonds this month. A lot of Chinese property developers are highly leveraged and are vulnerable to the declining housing market. The volatile housing market will continue to be one of the biggest risk factors to the economy this year.

In 2015, all eyes will be on the Chinese central bank, which has been relatively reluctant to cut interest rates to stimulate the economy. 

ANZ predicts the central bank will cut the reserve requirement ratio by as much 150 basis points next year. The head of monetary policy at the central bank says it will strike a balance between preventing a more dramatic slowdown and curbing further expansion in corporate and government leverage.

All recent data suggest China does not need to expand at a high official growth target to maintain a high level of employment as well as wage growth. Beijing is expected to become more tolerant of slower expansion and focus more on the quality of growth. The silver lining to the country’s ever-slower GDP growth is that the much-needed rebalancing is taking place, which would set China on a more sustainable path.



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