Option A: China grows at slowest rate in 25 years
Option B: China one of world’s fastest growing economies
The paradox is that both are true.
China generated more than a third of global GDP growth in 2015, yet many of its citizens and business leaders and also its suppliers from around the world felt worse off.
The latter often were much worse off due to the decline in prices of their commodity exports, the former were generally not: they felt that way as a result of personal incomes and business revenues growing much more slowly than they had come to expect as standard over the last 10 years.
There were few surprises in the year end numbers announced for China’s economy over the last few days. Growth is trending slightly lower, investment is trending slightly lower, manufacturing value added is growing slightly more slowly, and retail sales are trending slightly lower (but are still growing at a double digit rate) – slightly being the key word.
In first and second tier cities, housing inventories have fallen pretty close to normal levels and prices are rising modestly (the same can’t be said for third and fourth tier cities). Much of the service sector is doing very well. Which all just reinforces that describing China’s economy in aggregate becomes harder and harder, as there are so many sub-economies, performing so divergently within its $11 trillion total. And if it is hard to describe, imagine how much harder it is to manage effectively.
Effective management is one of the biggest concerns for China’s economy in the year ahead. We have all seen mismanagement writ large in the response to the downs and ups of the stock market in the last 12 months, with the head of the regulator this week blaming lack of talent in his organization for their failings.
No surprise there: if you were talented would you go work for a regulator that everyone historically ignored, where you got paid little, and where there was a good chance that an anti-corruption campaign might sweep you up one day? Or would you rather work at a stock brokerage and get rich by investing in the one-way bets that the market seemed to consist of?
Same can be said of many other areas of government – great talent at the top, increasingly thin in the middle and below.
What else to pay attention to?
Capital outflows for sure, much more important than ups and downs in share prices. Monthly outflows of greater than US$100 billion a month can continue for a while but not indefinitely, and if moving money out ends up being seen as the same kind of one-way bet that investing into the stock market was last year, flows could rapidly accelerate.
Will Chinese businesses still be able to make acquisitions internationally as they have been encouraged to for the last few years? A continuing steady flow of acquisitions will be a good sign, a massive increase in the first quarter of the year less so, rather an indication that businesses feel it is “now or never”. Already there are signs of brakes being put on the ability of companies to move money out of China.
They could be put on much harder and will have to be unless the government can persuade those with capital that it is totally safe and secure to keep it within China. Reducing outflows in an orderly fashion without disrupting basic business activities, and while sustaining consumer confidence, is a critical task for China’s economic leaders in the first half of 2016.
Incomes rising at a rate that will encourage the urban middle class to keep growing their spending. Household disposable income grew 9% last year in nominal terms, still good enough to have to sustain high levels of consumer confidence, and to enable consumer spending to be the main driver of economic growth in 2015. However, that was 2% points lower than the year before and the trend line is clearly downward.
Will there be a point in 2016 at which Chinese consumers feel that they should rather save their marginal dollar of income than spend it? Whether the hundred and ten million Chinese that travelled overseas on vacation last year do so again in 2016, and whether they are joined by 10-20 million more, will disclose a lot about true consumer confidence. Focus in particular on the starting salaries for new graduates, who exceptionally have seen almost no increase for many years.
A second driver of consumer confidence is their wealth, which for most households remains tied up in property. So it’s good news to see that property prices are rising again in nearly half of cities surveyed. Follow this trend also.
Manufacturing sector productivity. Over 130 million Chinese are directly employed in the manufacturing sector. Increasingly these jobs require technical skills and are better paid. This has been possible due to the double digit increases in capital and labor productivity that have kept so much manufacturing in China.
However, it looks like that overall manufacturing productivity growth fell dramatically in 2015; a repetition in 2016 would put great pressure on corporate profits, wages and jobs. Just 4-5 sectors – steel, coal, chemicals, etc – were responsible for much of this poor performance, but even more competitive sectors were challenged by continued factory price deflation.
I do not expect China imports to rise significantly in 2016, leaving commodity exporters largely where they are today. Agricultural imports may be an exception as China’s demand for everything from cereal to beef continues to rise.
As in any year there will be “moments of truth” when China’s leaders will want everything to show steadiness and continuity. Perhaps the most important in 2016 will be the G20 heads of state meeting in September in east China.
Expect that everything possible will be done to ensure there is minimal volatility in the economy, including the stock market, in the run up to the meeting, even if doing so creates pressures that are hard to release without creating greater volatility after the event. Other key moments will be around China’s key internal leadership meetings.
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The Chinese economy has momentum and is still growing, growing at a pace that few members of the G20 could ever think of matching. However, that momentum is much more dependent on the Chinese consumer than ever before and less dependent on government spending on roads and buildings. It is a new challenge for China’s leaders to guide this more complex, more diverse, and more globally connected economy.
Let’s all hope they do so well.