Why Chinese economy will slowdown?

Fri, 12 Apr Pre-Open

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The era of double digit high growth rate of China for over three decades that made it the world's second largest economy might be over. It will have to settle for declining GDP and rise in trade deficit from now on. A closer look at the underlying drivers of growth reveals that the slowdown is closely linked to the ongoing rebalancing of the Chinese economy.

With government investment, formerly a key driver of expansion, being reigned in and weak demand for global exports, China's growth has to rely more on private enterprise and consumption. China's leadership appears to have accepted the ensuing slowdown as a necessary cost of rebalancing while shifting its focus from GDP to per capita income growth, a key driver of social stability.

The investment/export driven growth model was adopted by a number of countries, including Japan, which witnessed rapid growth followed by a period of economic rebalancing. Looking at the transitions experienced by these countries provides an interesting comparison for China's current performance and outlook. China is not only 10 times larger than Japan in terms of population, it also invested more on a relative basis than Japan or Korea, and subsequently depressed consumption more than they did. There are two critical factors at play in China that differ markedly from the experiences of the other Asian growth economies.

The first factor is relating to the size and development of China's domestic market. It is both significantly larger as well as relatively underdeveloped when compared to other Asian countries at the time of their slowdowns. Chinese consumption has significant room and a sufficiently large domestic market to grow to pick up the slack left by flagging exports and a decade of high investment rates, unlike other Asian countries which saw a sharp drop in growth.

Second, it is worth pointing out that GDP growth does not equal sector growth. Even in a 6-8% growth scenario for China there will still be multiple sectors expanding at two to three times that rate. Retail and consumer related sectors should continue to grow at income growth levels or above, in the double digit levels, and could continue to do so until the economy effectively rebalances.

Thus, a comparison to other countries that transitioned from an investment driven growth shows that China's economy still has plenty of steam for high growth left, particularly in sectors relating to domestic demand. While the era of 10% sustained annual growth may be over, the China Story clearly still has a long way to go.