How China has changed
Everyone is talking about China and the conversation is mostly unsettling. The collapse in iron ore prices, falling oil and coal prices and persistently low metal prices all appear to confirm what official growth statistics have been saying; the Chinese colossus is slowing.
For those skeptical about official Chinese GDP data (there is good reason to doubt it), ancillary data tells the same story. Power generation, freight rail movements and credit volumes are all lower. Even smog indicators around the steel belt are falling, suggesting less production.
Yet employment numbers haven’t budged. If the industrial economy is sluggish and capacity is falling, where are all the workers going? And where are new entrants into the labour market –12m workers a year – being employed?
To answer that question we need to look more broadly at the Chinese economy. Once a monotonous industrial machine, it is now more diverse. Services and consumption account for a growing share of the economy and, for the first time, these non-industrial sectors are contributing more to growth than the old industrial sectors.
A raft of figures helps illustrate the point. Power consumption in the industrial sector is down but, among the services sector, it is growing by over 7%. Retail sales are growing more than 10% and more than 100m Chinese tourists travelled abroad over the past 12 months. Famously cautious Chinese consumers are spending freely; Ikea revealed earlier that about 75m customers had visited its 18 Chinese stores last year. This is not an economy in crisis.
Far from being a basket case of instability of fumbling growth, the Chinese economy, judging by the behavior of consumers, is doing reasonably well. The composition of growth has changed and the old, well watched metrics fail to capture areas of new growth.
Everyone agrees that China needs to make the transition from a growth model led by fixed asset investment to one led by consumption. That is exactly what is happening.
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Frequently Asked Questions about this Article…
The conversation around China's economy slowing down is largely due to the collapse in iron ore prices, falling oil and coal prices, and persistently low metal prices. These factors, along with ancillary data like lower power generation and freight rail movements, suggest a slowdown in the industrial sector.
Despite concerns, the Chinese economy is not in crisis. While the industrial sector is sluggish, the services and consumption sectors are growing. Retail sales are up by more than 10%, and Chinese consumers are spending more freely, indicating a shift towards a consumption-led growth model.
Employment numbers in China have remained stable despite the industrial slowdown. This is because the economy is diversifying, with services and consumption sectors absorbing new workers and contributing more to economic growth than traditional industrial sectors.
The services and consumption sectors are now driving growth in the Chinese economy. Power consumption in these sectors is growing, and retail sales are increasing, indicating a shift from the traditional industrial-led growth model.
Chinese consumers are contributing to economic growth by spending more freely. Retail sales are growing, and more than 100 million Chinese tourists traveled abroad in the past year, showcasing increased consumer confidence and spending.
China is transitioning from a growth model led by fixed asset investment to one led by consumption. This shift is evident in the growing contribution of the services and consumption sectors to the economy, as opposed to the traditional industrial sectors.
Traditional metrics are failing to capture China's new growth areas because they focus on industrial outputs, which are declining. However, the services and consumption sectors are growing, indicating a shift in the composition of economic growth that these metrics do not fully reflect.
Investors can gain more insights into China's economic changes by exploring stock research and BUY recommendations. A 15-day free trial of Intelligent Investor offers detailed analysis and insights into the evolving Chinese economy.
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