Macroscope | China’s economic reforms are working. The bad news is the pain may get worse

Aidan Yao says amid a growth slowdown, the strengthening service sector and household consumption are welcome news. Even so, softening global demand and challenging conditions at home will keep economic planners on their toes

Reading Time:3 minutes

Shoppers browse inside an Apple store in Shanghai. Consumption remains the largest growth contributor in China’s economy, making up 76 per cent of fourth-quarter GDP growth. Photo: Bloomberg

Published: 2:00pm, 30 Jan 2019Updated: 10:26pm, 30 Jan 2019

The Chinese economy ended 2018 on a weak note, but not so weak that people now fear growth will fall off a cliff. Gross domestic product growth in the fourth quarter clocked in at 6.4 per cent, the weakest since the first quarter of 2009, but in line with market expectations. The quarterly growth profile, which shows a persistent weakening trend – from 6.8 per cent in the first quarter, to 6.7 per cent, 6.5 per cent and now 6.4 per cent – is indicative of the harsher conditions facing the economy.

Yet, despite the overall economic slowdown, rebalancing of the growth model has continued. According to the National Bureau of Statistics, the service sector now accounts for 52 per cent of the economy and has continued to grow at a solid 7.6 per cent. That is 1.8 percentage points and 4.1 percentage points faster than the secondary and primary industries respectively.

On the expenditure side, consumption remains the largest growth contributor, making up 76 per cent of fourth-quarter GDP growth. The bureau noted that service-related transactions now account for more than 44 per cent of household consumption, making them a critical component for gauging the health of the household sector and the overall economy.

However, given the lack of high-frequency indicators, our reading of this rapidly growing part of the economy is often delayed and incomplete. This could explain, at least partially, why the GDP data can sometimes present a different growth picture from that of monthly activity data, which has service-sector coverage.

Looking at the latest figures, there may be light at the end of the tunnel. All three key indicators – industrial production, retail sales and fixed asset investment – show an improvement, with monthly growth either stable or up from previous readings. With external demand weakening and US tariffs starting to bite, this strength appears to be home-grown.

One case in point is the turnaround in infrastructure investment, which grew by 5.7 per cent in the fourth quarter, up from a contraction of 4.4 per cent three months ago. The early allocation of 1.39 trillion yuan (US$202 billion) worth of local government bond issuances, ahead of approval by the National People’s Congress, should help to keep this momentum going.

Aiding this fiscal stimulus are signs that credit may finally be flowing to the real economy. The latest credit data shows that growth in bank loans accelerated for the first time in six months, to 13.5 per cent, the highest since December 2016, while corporate bond issuances also rebounded last month.

Select Voice

Choose your listening speed

Get through articles 2x faster

1.25x

250 WPM

Slow

Average

Fast

00:0000:00

1.25x