Third-quarter GDP growth came in at 6.9%, its slowest quarterly growth since the immediate aftermath of the 2008 global financial crisis.
The outcome was one tenth of a percentage point faster than forecast by private economists and in line with the government’s official target of “about 7%,” which Prime Minister Li Keqiang has fudged even more by saying slower growth is acceptable provided sufficient new jobs were being created — the subtext being that growth won’t be allowed to slow to the point where social stability is at risk.
To that end a series of old-school pump-priming measures have been taken — interest rate cuts (five in the past year), lowered bank reserve ratios (on three occasions), aid for exporters and speeded-up approvals for large infrastructure investment. However, as we have noted many times, these hold back the switch away from the economy being led by (debt-financed) infrastructure investment and exports to being led by domestic consumption.
Nonetheless that ‘rebalancing’ is happening, albeit more slowly than the leadership would like, and China needs for reasons that we shall return to below.
For all the attention paid around the world to the economic indicators of industrial output and merchandise trade, the tertiary sector of the economy — i.e. services — is growing faster than the secondary — i.e. manufacturing, mining and construction. In the third quarter, services expanded by 8.4% compared to secondary industry’s 6%.
In 2006, according to World Bank figures, industry accounted for 47.4% of the economy, services 41.9% and agriculture 10.7%. By 2012, services had nosed ahead of industry, 45.5% to 45.0% with agriculture at 9.5%. For last year, the numbers are estimated to have been 48.2% and 42.6. Meanwhile, exports have failed from the equivalent of 35.7% of GDP to 24.2%.
By comparison, services accounted for 78.1% of GDP in the U.S. in 2012 and industry for 20.6%. In Germany, the numbers were 68.7% and 30.5%, respectively, which gives a sense of how far China still has to go in rebalancing.
That all said, stronger fiscal spending and more measures to promote rapid credit growth is likely in coming months to keep the pump primed and the growth slowdown on a measured glide path. At the same time, the leadership needs to keep pushing through the deeper structural reforms that rebalancing demands and which China is running out of time to put in place if the country is to vault from the ranks of poor countries to rich.
The incongruity is that in the process of making its economy more market-oriented — albeit market-oriented with Chinese characteristics — it is building up its state-owned enterprises (SOE) to be more innovative and business-like in a way that distorts markets and entrenches vested interests that, in turn, increase the resistance to reform. It also crowds out the entrepreneurs and small and medium sized companies where growth-generating innovation flourishes.
Those need a business environment that is framed by good institutions and a regulatory and governance regime that may not be to the taste of big business in the form of the SOEs, who see their (patriotic) role as competing with other multinationals not fending off pesky upstarts at home. The third-quarter figures underline how much of a hard slog putting that in place that is proving to be.