Chinese economy slows down to the new normal

Growth in the Chinese economy has slowed, but investors shouldn't expect a crash.

Andrew Van Sickle
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published
in News

China's GDP grew by 7.3% year-on-year in the third quarter of 2014, the slowest pace since the global financial crisis five years ago. The property sector, a key driver of growth in recent years, has dragged down overall performance.

China now looks set for its slowest annual growth since 1990. The Chinese government described the slowdown as the "new normal".

What the commentators said

"Those looking for a collapse of the Chinese economy will continue to wait," said Alex Frangos in The Wall Street Journal. The government is trying to wean the economy off a credit-fuelled investment binge and to encourage consumption, even as the property market slides.

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So far it has done well. It has provided "dribs and drabs of stimulus", but has steered clear of broad interest-rate cuts to avoid a return to "the old debt-fuelled playbook".

There are "signs of rebalancing", added Linda Yueh on BBC.co.uk. Rising wages have helped to boost retail sales, and consumption now exceeds 48% of GDP for the first time which is about par for the course for a country at this level of development.

But it's too soon to say that China has successfully popped its credit bubble. Total debt relative to GDP jumped from 147% in 2008 to 251% this year. Credit is still growing at nearly twice the rate of nominal GDP, noted Jamil Anderlini on FT.com.

But don't expect a Lehman-style meltdown. China owns its banks, says The Economist, and has enough money to bail them out in a crisis. The danger is that policymakers "do too little to clean up the financial system, weighing down its economy for years with zombie firms and unpayable loans".

Free-market reforms to the banking sector are crucial "a culture of bankruptcy" and moral hazard must replace state "lifelines". Otherwise China could end up like Japan without having got rich at all.

Andrew Van Sickle
Andrew Van Sickle
Editor, MoneyWeek

Andrew is the editor of MoneyWeek magazine. He grew up in Vienna and studied at the University of St Andrews, where he gained a first-class MA in geography & international relations.

After graduating he began to contribute to the foreign page of The Week and soon afterwards joined MoneyWeek at its inception in October 2000. He helped Merryn Somerset Webb establish it as Britain’s best-selling financial magazine, contributing to every section of the publication and specialising in macroeconomics and stockmarkets, before going part-time.

His freelance projects have included a 2009 relaunch of The Pharma Letter, where he covered corporate news and political developments in the German pharmaceuticals market for two years, and a multiyear stint as deputy editor of the Barclays account at Redwood, a marketing agency.

Andrew has been editing MoneyWeek since 2018, and continues to specialise in investment and news in German-speaking countries owing to his fluent command of the language.

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