<![CDATA[China's economy is slowing, but it has the keys to future growth]>
China's third-quarter economic growth of 6 per cent is not only the slowest rate since Beijing began publishing such data in 1992, it also suggests the economy is right at the bottom of the central government's full-year growth target of between 6 per cent and 6.5 per cent.
The dim economic report for the July-September period came on the heels of gloomy forecasts by international institutions, with the International Monetary Fund citing US-China trade tensions as a driving factor for such "sluggish global growth". Uncertainty over global trade and the global economy was at its highest point in more than 20 years, the Institute of International Finance said recently, citing the latest readings of the World Uncertainty Index and the World Trade Uncertainty Index.
That the growth of the world's second-largest economy has decelerated at a quarterly rate of 0.2 percentage points this year " after slowing from the first quarter's 6.4 per cent annualised growth to 6.2 per cent in the second quarter " may have made a significant contribution to the moribund global prospects. The latest Chinese economic report may indicate that the economy is heading towards the politically sensitive benchmark of under 6 per cent in the final quarter of this year and in 2020, as there are no signs the slowdown will abate.
A breakdown suggests growth across the board cooled in the third quarter, despite some recoveries in industrial production and retail sales. The actual growth slowdown might be worse than the official numbers, as nominal GDP growth " which is more relevant for investors " dropped to 7.6 per cent year-on-year in the third quarter from 8.3 per cent in the second. Nominal GDP growth was 9.7 per cent for the whole of last year.
Employees work on the production line of a robot vacuum cleaner factory in Shenzhen, China. Photo: Reuters alt=Employees work on the production line of a robot vacuum cleaner factory in Shenzhen, China. Photo: Reuters
The notable deceleration of growth momentum in the third quarter may spark a more rapid deceleration in aggregate demand growth, despite the government's stimulative policy support initiatives for the economy since the middle of last year, which include major tax and rate cuts, boosts to bank lending and massive investment in infrastructure projects.
The crux of the matter is that there is no sign of significant improvement in manufacturing and exports, the drivers of the growth slowdown this year. The overall growth of manufacturing cooled from 6.1 per cent year-on-year in the first quarter to 5.6 per cent in the second and 5.2 per cent in the third. Exports continued to decline due to slowing global economic growth and the spiralling US-China tariff war.
The government announced tax cuts worth 2 trillion yuan (US$282.7 billion) in March, or more than 2 per cent of China's 90 trillion yuan GDP for last year. The central government had also moved to increase investment in public infrastructure projects ahead of the Communist Party's October 1 celebration of its 70th year in power. The National Development and Reform Commission, the state planning agency, approved projects worth 178 billion yuan in September, well above the monthly average of 48 billion for the rest of the year.
Total credit growth has accelerated to between 10 per cent and 11 per cent throughout 2019, under a relatively loose monetary policy. However, such policy support failed to halt the downward trend of China's economic growth over the past decade, from a peak of 14.23 per cent in 2007 to last year's 6.6 per cent. In fact, last year's growth rate was the lowest recorded since 1990, when the economy suffered a major setback following economic sanctions imposed by developed economies in the West in the aftermath of the 1989 crackdown on the pro-democracy movement in Tiananmen Square.
Investors monitor stock prices at a brokerage in Beijing. Photo: AP alt=Investors monitor stock prices at a brokerage in Beijing. Photo: AP
The question now is how deep and sharp the drops will be as the economy moves along the path to ever-slower growth, with the downward trend accelerating quarter by quarter since last year. While China is still expanding faster than any other major economy, the two growth engines that fuelled the past few decades of robust growth " export-oriented manufacturing and infrastructure capital investment " have lost all momentum.
Its labour force is shrinking, and the country is already full of roads, railways, power stations and factories, limiting potential new investment. The truth is that after decades of infrastructure investment, there are not many projects left to invest in. Policy options to stimulate growth are limited, in view of China's debt.
China's debt has risen to more than US$40 trillion " or over 300 per cent of its GDP " as Beijing loosened curbs on borrowing to boost growth, according to Institute of International Finance data. Its debt is among the highest in the world, and represents some 15 per cent of the overall global total. Policymakers this year eased a two-year-long deleveraging campaign in a bid to aid the slowing economy, amid the US-China trade war. The 18-month tariff conflict not only represents the single greatest threat to global economic growth, but may also suggest a potential decoupling between the world's two biggest economies, as well as deglobalisation. China needs the world much more than any other country, due to its overreliance on exports and for its prominent role in the global supply chain.
A production line at a local automobile technology company in northern China's Hebei Province. Photo: Xinhua alt=A production line at a local automobile technology company in northern China's Hebei Province. Photo: Xinhua
China's prosperity has been built on global free trade, as multinationals moved production to the country for its cheaper human and natural resources, enabling the world's most populous nation to become a global manufacturing hub.
Economic globalisation and integration have played a key role in China's remarkable two-digit growth rates over the four decades since the late paramount leader Deng Xiaoping implemented his opening-up policy. But the traditional drivers of growth are losing their momentum, with declining returns on capital investment and a rapidly ageing population.
The government can still take on a huge amount of debt to generate politically acceptable GDP growth. But that would not be real growth, just economic activity, as such investment would often be unprofitable and fail to cover initial costs " and only result in a further climb in bad debt.
China is at a crossroads, and its real and sustainable growth depends on Beijing's determination to solve the two most critical and interconnected issues about its future development " to revive its stalled market reform to build a level playing field for all, from state-owned and private enterprises, to domestic or foreign entities; and to further open up its markets to all investors by scrapping state monopolies.
This article originally appeared on the South China Morning Post (SCMP).
Copyright (c) 2019. South China Morning Post Publishers Ltd. All rights reserved.
