As China's growth rate inevitably begins to slow, Derry Pickford, macro analyst at Ashburton, takes a look at whether investors should really be nervous.
China’s GDP growth rate between 2003 and 2007 was extraordinary. During this period, growth was just over 11.6% p.a. (according to the IMF): a five-year period only really matched in recent times by the 1992-1996 surge, when growth averaged 11.5%. Perhaps even more surprising has been how rapidly China has grown in the subsequent five years.
Growth averaged 9.3% between 2008 and 2009 despite the financial crisis, beating the slowdown it experienced during the Asian crisis of 1997-2001, when an average of 8.3% was achieved.
Growth at these levels inevitably sparks debate about whether China is heading for a collapse. Everyone agrees that it cannot keep growing above 8% forever but will the landing be soft, with growth gently decelerating over time, or will it be hard, where the economy grows in the low single digits? Might it even contract?
Is China starting to rebalance at last?
Investors are nervy. A small shortfall in the April industrial production numbers (which came in at 9.3% year-on-year versus an expected 9.4% and 9.4% back in March) reignited concern about whether China is slowing too quickly.
This has come on the back of a slowdown in the GDP growth rate to 7.7% in Q1 this year, with ‘secondary industry’ (which includes mining as well as industrial production and construction) slowing to only 7.8%.
Should we be worried?
A slowdown in Chinese GDP growth is both inevitable and desirable. China enjoyed a rapidly growing workforce (3% p.a. in the 1980s, slowing to 1% in the last decade) that has become better educated. While educated levels will continue to improve, the workforce will start contracting by the end of this decade, a function of the one child policy.
China can only, therefore, keep growing at a rapid pace if it continues to deepen its capital stock or improve total factor productivity (TFP) growth: how much output can be improved by using the same set of inputs but in a more efficient manner. It is difficult to calculate how much of Chinese growth has come from capital accumulation and how much has come from TFP.
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