Braced for the 'new normal' in China

It's not the quantity of Chinese growth that is important, but the quality.

China's economy grew by 7.4% in 2014, down from 7.7% in 2013. A fall in "fixed asset investment" (mainly in the form of spending on property and factories) was the main reason for the slowdown.

Even so, last year, China's output was more than $10trn. It's only the second country to achieve this milestone after America. The economy is now five times bigger than it was a decade ago and 25 times the size it was in 1990.

What the commentators said

One reason for this, as the Lex column in the Financial Times pointed out, is that "there is more of the economy to grow", so raising the total as rapidly as in the past gets harder. But the key issue is that China "has long been a junkie of fixed investment".

The government is trying to wean the economy off the credit-fuelled property and infrastructure binge of the past six years and shift focus towards consumption and services. The so-called 'new normal', then, is about the quality of growth, not merely the quantity.

Statistics suggest that the transformation of China "from the world's factory to the world's shopping mall" is making progress, said Jonathan Kaiman in The Guardian.

Consumer spending continued to expand consumption underpinned 51.2% of growth last year, up 3% from a year earlier, said Economist.com's Free Exchange blog. (In the US and UK, it comprises over 65%.)

Also, healthy wage growth has boosted workers' share of output, key in terms of "tilting the country towards greater consumption".

Yet deflating the credit bubble won't be easy. Credit growth is rising faster than overall GDP. The government fears that a sharp slowdown in growth could stoke social unrest as employment suffers. But micromanaging a debt-saturated economy is tricky, as Mark Magnier put it in The Wall Street Journal.

Channelling loans to specific sectors is getting more difficult "as banks balk at adding more nonperforming loans and borrowers hesitate". And if the state decides to allow another economy-wide lending spree, the debt pile would only grow, potentially causing a crash, or a worse slowdown, later. There is a long way to go, and the Chinese government is walking a tightrope.

Recommended

I wish I knew what an emerging market was, but I’m too embarrassed to ask
Too embarrassed to ask

I wish I knew what an emerging market was, but I’m too embarrassed to ask

This week's “too embarrassed to ask” explains what emerging markets are, and why you might want to invest in them.
9 Sep 2020
Bullish investors return to emerging markets
Stockmarkets

Bullish investors return to emerging markets

The ink had barely dried on the US-China trade deal before the bulls began pouring into emerging markets.
27 Jan 2020
Forget austerity – governments and central banks have no intention of cutting back
Global Economy

Forget austerity – governments and central banks have no intention of cutting back

Once the pandemic is over will we return to an era of austerity to pay for all the stimulus? Not likely, says John Stepek. The money will continue to …
15 Jan 2021
Why investors should beware of India’s surging stockmarket
Emerging markets

Why investors should beware of India’s surging stockmarket

The BSE Sensex benchmark index has soared by 90% since March, largely driven by foreign investors. But India's bull market is very vulnerable.
15 Jan 2021

Most Popular

Bitcoin: fool’s gold or the new gold?
Bitcoin

Bitcoin: fool’s gold or the new gold?

With bitcoin hitting new highs last week, and close to becoming a mainstream investment, is it really gold for the 21st century?
15 Jan 2021
The MoneyWeek Podcast: bitcoin special
Bitcoin

The MoneyWeek Podcast: bitcoin special

Merryn talks to bitcoin experts Dominic Frisby and Charlie Morris to get the lowdown on the cryptocurrency to find out why it's such a huge global phe…
15 Jan 2021
Leasehold reforms promise the end of a nightmare for many homeowners
Property

Leasehold reforms promise the end of a nightmare for many homeowners

Horror stories about unscrupulous landlords profiting from a legal relic of the feudal era are about to get a happy ending, says Simon Wilson.
16 Jan 2021
Free 6 issue trial then continue to