China's slower growth raises rebalancing stakes
Weaker figures for mainland's second-quarter gross domestic product highlight need for Beijing to shift towards domestic consumption
On a humid summer afternoon, roadbuilder Zhang Hongxin from rural Shaanxi province offered living proof of the country's increasingly urgent need to rebalance its economy towards domestic consumption and away from fragile foreign demand that yesterday was revealed to have dragged economic growth down to its lowest in a year in the second quarter.
Domestic demand was a relative bright spot in an otherwise gloomy second quarter that saw annual growth slip to 7.5 per cent from 7.7 per cent in the first three months of the year, but economists doubt it can do the heavy lifting to turn the entire economy around - especially while the likes of Zhang earn only 100 yuan (HK$126) a day, subsist on a diet of rice soup and steamed buns - never meat - and live roughly in temporary sheds by the side of the road he is building.
"We expect consumption growth to remain fairly steady even though we would not expect consumption to be an independent driver of the cycle" is how Louis Kuijs, an economist at Royal Bank of Scotland in Hong Kong put it in a note to clients.
In other words, until Zhang and the about 260 million migrant workers nationwide like him can be turned into an army of free-wheeling consumers, Beijing cannot fully replace the spending power of the fickle foreigners who have slashed purchases in the wake of the 2008-09 global financial crisis.
Net exports were the big drag on second-quarter growth, shaving 1.4 percentage points from gross domestic product from the same period last year, putting the economy back on the barely interrupted downward trend it has been on since early 2010.
Add in the structural shift that economists anticipate pushing economic growth closer to 5 per cent by the end of this decade than the average annual 10 per cent seen for the past 30 years, and the enormity of the challenge facing policymakers is clear.
Senior policy advisers were pondering how to make it happen at a meeting in Xian.
"The biggest potential to spur domestic demand is to shift consumption from the countryside to urban areas," said Li Tie, a director-general at the China Centre for Urban Development under the National Development and Reform Commission.
Create conditions for migrant workers to find jobs and live in cities and you immediately create demand for properties, furniture, decoration materials for houses, education and health-care services.
It is a big task considering migrant workers in Shaanxi earned about 1,500 yuan a month last year, even as their wages have been on the rise in recent years.
But policymakers are determined to make it happen, having pledged to double real incomes over the next 10 years as part of the shift.
Sheng Laiyun, a spokesman for the National Bureau of Statistics, said the government's push to raise its urbanisation ratio from last year's 52.6 per cent would "unleash huge potential for both investment and consumption".
A ratio between 70 and 80 per cent is common among developed economies, similar to the proportion of economic output that is derived from domestic consumption - a figure mainland officials like the look of in the battle against fluctuating foreign demand given a population of 1.3 billion that offers huge room for growth through rebalancing.
Making the shift though is not easy, requiring a complete overhaul of the investment-led growth model that has been fuelled by more than a decade of rapacious external demand for cheap Chinese exports.
A rise in the value of the yuan against a wide swathe of currencies from countries that compete with mainland manufacturers as well as customers for the goods their production lines churn out makes the shift more painful.
The currency's gains shifts the balance between exports and imports, accelerates a drive towards domestic demand through the services sector from manufacturing and makes it harder to dump any excess capacity overseas.
"The country is experiencing pains brought by domestic economic restructuring," Sheng said.
But it has more to come, according to analysts Mark Williams and Wang Qinwei at London-based Capital Economics.
"The bad news is that China's economy shows no signs yet of weaning itself off its reliance on investment," they said in a research note. "We would be more confident if we could see that China's slowdown was being accompanied by a shift in the drivers of growth from investment to consumption."
According to them, contribution from consumption in the growth of GDP in the second quarter fell to 2.5 percentage points from 4.3 while the weight of investment rose to 5.9 percentage points from 2.3 to reach the highest since two years ago.
Growth in fixed-asset investment, the key barometer of such spending, eased to 20.1 per cent from 20.4 per cent in the first quarter.