Despite the slowdown in GDP, a deeper look at the statistics may provide reason for optimism
At first glance, China’s third-quarter economic performance doesn’t grab much attention. According to the National Bureau of Statistics, GDP growth slowed to 6.5 percent year-on-year, the lowest since the first quarter of 2009, early in the global financial crisis.
A slowdown of industrial added value and lukewarm consumer sentiment were cited as some of the not-so-cheerful signs, while there were also doubts about the future trajectory of the world’s second-largest economy.
But a deep dive into the statistics may provide reason for optimism.
First of all, the slowdown of China’s economy is not a new story. It is a result of the fact that China’s economic development has been striving to reach a new stage – to be driven by quality rather than quantity.
Against this broad background, the improvement of the economic structure becomes more important. And there is reason to be optimistic. In the first three quarters of this year, the service industry’s added value grew by 7.7 percent, contributing 60.8 percent of the economic growth, an increase of 1.8 percentage points. The tertiary industry’s share of the total GDP came in at 53.1 percent in the first three quarters, up 0.3 points, an indication of incremental and steady improvement of the economic structure.
The improvements can also be observed in other areas. Consumption of services accounted for 52.6 percent of total consumer consumption in the third quarter, up 0.2 percentage points. Investment in high-tech manufacturing industry grew 14.9 percent in the first three quarter, compared with 5.4 percent growth in total investment.
The 6.5 percent GDP growth in the third quarter may not be impressive, but it is well within the comfort zone that ensures sufficient employment.
In September, the jobless rate in urban areas stood at 4.9 percent, down 0.1 percentage points year-on-year. The jobless rate in 31 major cities was 4.7 percent, 0.2 points lower than the previous month. In the first three quarters, China created more than 11 million new employment opportunities in urban areas, beating the yearly target.
What bodes well for the months ahead is that the consumer price index, the major gauge of inflation, remained in a reasonable range. The index stood at 2.1 percent in the first three quarters, providing support to consumption and creating room for future monetary policies. Although the CPI rose to 2.5 percent in September, the increase was more a result of seasonable factors. The traditional Mid-Autumn Festival, which often causes price hikes, fell in September this year. Last year, the festival was in October.
Generally speaking, Chinese economic fundamentals remain solid and resilient.
But there are still reasons to strike a note of caution, as China faces some downward pressures that may not disappear quickly. Foreign trade will likely have a harder time. Although both imports and exports continued to increase in the third quarter, it is more a result of traders’ choice of beefing up stocks before tariff rates go even higher. In the rest of the year, it’s likely they will slow down their trade activities because of uncertainty.
Externally, the uncertainty arising from trade tensions with the United States will continue, at least from some time. Internally, deleveraging pressure will affect investment and consumption sentiments.
This situation calls for the government to boldly use fiscal and monetary measures to provide enough fuel for the economy in the months to come.
In that direction, the authorities have adopted some easing measures recently, resulting in a significant improvement in September credit data. M2 growth increased to 8.3 percent from 8.2 percent previously, as did new yuan loans and total social financing.
What is laudable is that the People’s Bank of China, the central bank, has taken another step to decrease the required reserve ratio for commercial banks by 100 basis points, effective from Oct 15 – a great loosening that will help shore up liquidity for the market.
That decision may suggest that the authorities are ready to take a pro-growth approach at a time of challenges and uncertainty. It will not be a surprise for the central bank to cut interest rates, if the market needs it.
Other than monetary moves, it is expected that infrastructure investment will pick up in the rest of the year.
In late July, central authorities asked to accelerate infrastructure projects, especially in central and western areas. However, this will take some time for ministries and local governments to implement. Now, with three months passed for preparation, chances are high that a number of major projects will be kicked off or accelerated, providing strong support to economic growth in the rest of the year and next year.
The property market, too, is expected to warm up somehow in the near future. Although the government does not show any major intention to lift restrictions, real estate developers will have to speed up construction of housing to help repay their debts, much of which will be due from now to 2021.
In terms of future consumption demand, although consumer confidence has been hit by factors such as rising prices and sluggish equity market, it remains in the positive zone, with rising incomes. In the first three quarters, per capita disposable income stood at 21,035 yuan ($3020; 2,650 euros; ￡2,350), up by 8.8 percent year-on-year, higher than the GDP growth rate. That provides a good foundation for continued consumption and economic restructuring.
Another positive sign is that several major senior officials explicitly voiced their confidence in the Chinese economy, vowing to take measures to maintain the stability of the financial market and shore up the economy. That is a clear gesture that the government will take growth and stability as top priorities, with bold tools to be used if needed.
In the long run, China’s path for achieving its economic goals leads in two important directions. One is to continue to activate the dynamics of market participants. To that end, it is critical to reduce the taxation and fee levies for businesses.
It is important to eradicate some “shadow” fees levied by local authorities that have invisibly added to the cost of business, especially small and medium-sized enterprises. Those shadow fees often come in the form of administrative fees and fines.
The other direction leads to continued opening-up by deregulating industries and embracing the rest of the world. This year, some exciting measures such as tariff reduction and market access broadening have been put in place to facilitate investment and strengthen China’s economic interactions with other markets. A few industries such as automobiles and finance, which had been traditionally less open, have seen greater opening-up this year. The recent release of the plan for establishing Hainan province as a free trade port represents the latest effort to advance China’s opening-up. It is expected that the island province can help pilot some new methods for liberalizing trade and investment that could be copied in other areas. If so, China’s economic engine will find new fuel.
The author is a guest researcher at the Center for China and Globalization. The views do not necessarily reflect those of China Daily.
(China Daily European Weekly 10/26/2018 page10)