The last time the global economy was hit be a major slowdown just over 10 years ago now, the pace and strength of recovery was in no small part down to the fact China’s economy avoided recession. A mild slowdown was the extent of the implosion of international financial markets on China’s juggernaut economy as the country’s central command quickly moved with an aggressive programme of stimulus.
Against the backdrop of growing evidence global economic growth is again nearing the turn of its cycle, there will be concern at this morning’s news that China’s 2018 growth rate has been calculated at 6.6%, slightly down on 2017’s 6.7%. It’s the lowest pace of annual growth since 1990, in the aftermath of sanctions imposed in retribution for the government’s Tiananmen Square attack on its own citizens.
The trade war with the USA that has been ongoing since the Trump administration decided in July last year to slap new tariffs on a range of Chinese imports. More were added in subsequent months and the moves reciprocated in kind by China. While that hasn’t had a major impact on the country’s overall GDP, it has hit one of China’s biggest underlying economic challenges – consumer spending. The trade war’s biggest impact has been to provoke nerves in Chinese households, which have responded by tightening the purse strings. The same can be said of businesses, which have reigned in capital spending.
China’s other priority is to reduce its dependency on debt-fuelled borrowing. The country’s investment rate is an unsustainable 44%, much of which is financed by borrowing. To avoid a ‘hard landing’ caused by economic growth contracting quickly after almost three decades of runaway growth, Beijing had been winding back fiscal and monetary stimulus over the past few years. However, slowing growth forced it into reversing that policy in an effort to boost consumer sentiment.
Consumer spending still accounts for just 39% of China’s GDP, compared to 66% and 68% in the UK and USA. With average GDP per capita still relatively low in China, below even other fast growing economies in the Asia-Pacific region, that is where plenty of growth potential remains. Incomes and spending increasing would, ideally, allow China to take to foot off the pedal in terms of offering cheap debt and making huge infrastructure investments. However, every time it tries to do so growth suffers and new stimulus measures are introduced. The government recently announced new tax cuts in its latest attempt to encourage spending.
China’s success in navigating towards a ‘soft landing’ as its economy matures and growth rates, still significantly higher than those in the EU, U.S. and Japan, slow, rest on it managing to break that vicious circle. Consumer and capital spending must increase and contribute more to GDP but levels of government, corporate and personal debt must somehow be managed at the same time.
If that balance isn’t struck, China may turn into a hindrance rather than a help to the next global slowdown. The silver lining is that India and other big developing economies in Asia may be stepping up. India’s growth is forecast to be significantly higher than China’s over the next 5, 10 and 20 years. However, starting from a base of very low GDP per capita, an accelerating India can’t be relied upon to pick up the economic slack from China immediately. So we should all be hoping the mood of Chinese consumers picks up and they open their wallets over the next several months.