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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