While China’s GDP growth continues to slow, there is no reason to expect a sudden drop in GDP or a government stimulus meant to artificially maintain the country’s previous highs according to a report from CLSA’s Andy Rothman.
China – GDP growth is dropping, but slowly
China’s slowing growth has been gradual so far, despite some analysts fears that it reduced global demand could trigger a more dramatic falloff. With the global financial crisis abating, a hard landing is even less likely.
The main factor behind China’s slowing growth is that value-added industrial (VAI) growth, a major component of the economy, is slowing, an issue that is not directly related to global demand. The report predicts that VAI will continue to taper off.
China – Smaller companies continue to thrive
Small- and medium-sized enterprises (SMEs) have grown 17.9 percent so far this year, compared to 18.1 percent by this time in 2012. Since these companies dominate the economy, their continued health points to a strong economy that is simply cooling after years of incredible growth. Even China’s state owned enterprises (SOEs) saw 3.3 percent growth compared to a 10.8 percent contraction in the first five months of last year.
Just as importantly, SMEs now account for more industrial profits than SOEs. This can be partially attributed to their superior growth numbers, but the state’s willingness to accommodate private enterprise is also essential.
China – Consumer market is still healthy
Consumer sales follow a similar pattern. Real retail sales fell from 12.1 percent in May to 11.7 percent, but this dip must be seen in light of an ongoing anti-corruption campaign that has negatively impacted the revenues of many larger restaurants. Disposal income among urban households continues to grow and migrant worker wages have actually accelerated. Combined with low household debt and moderate inflation, the report is optimistic about long-term consumer sentiment.
China – The state is ready for slower growth
Even gradually decelerating growth has some analysts concerned that the Chinese government will attempt to boost GDP with stimulus, creating a bubble that would need to be dealt with down the road. But this argument overestimates the importance of Chinese exports. Ten years ago the country exported 20 percent of its industrial output, but that number has dropped to just 10 percent today. Exports only accounted for about 1 percent of GDP growth even during China’s boom years.
Party leadership has also shifted focus from speed of growth to job development in its public statements and new policies. Government stimulus may become an option if unemployment begins to rise, but China has a strong jobs market and even its declining growth rates should be enough to maintain high levels of employment.
