The question of whether China will experience a hard or soft slowdown from the towering growth figures it has become accustomed to crashed back into the news this week. The latest official figures showed that GDP grew at its slowest pace for six years in the first quarter of 2015, at an annualised rate of 7 per cent.
But perspective is important. It seemed some commentators were so determined to see the negatives that they risked “missing the doughnut and seeing only the hole”.
While it is true that 7 per cent growth is lower than China has enjoyed for many years, it remains one of the highest rates in the world.
Furthermore, Chinese growth can be compared to that of other countries only if one highly significant factor is contemplated – the underlying rate of change in China. Its economy is shifting much more rapidly than that of other countries – a rebalancing which continues to move it from a focus on production, particularly manufacturing and construction, to a consumption-based model, where a growing middle class drives domestic spending on goods and services. The most recent analysis shows that the services sector is now a greater contributor to GDP than manufacturing, a staggering change given that China is still often seen as the world’s factory.
This diversification is very important. As more of China’s 1.35bn people begin to participate fully in the economy, the potential for future growth is substantial. We should bear in mind that the “westernisation” of the Chinese economy is not yet 30 years old, compared in some cases to centuries of liberalised economic development elsewhere.
China is uniquely placed to take decisive action from the centre should it be concerned about slowing momentum. The authorities could loosen monetary policy and watch it ripple out through the economy. People’s Bank of China governor Zhou Xiaochuan has already suggested action will be taken. As we have seen in the past, such policy actions in China are highly-stimulative and the country has enormous internal reserves with which to prime the pump.
A further consideration, year-on-year and decade-on-decade, is the compounding effect of 7 per cent growth on the substantially broader, deeper Chinese economy. Such compound growth is structurally significant and will self-sustain even more economic breadth and depth, bringing hundreds of millions of people more fully into the domestic economy.
The government is actively seeking to reform numerous sectors of the law as it relates to land use and ownership, corporate and commercial activity, and the financial sector. The first, land reform, is fundamental. China is a vast country, and while the cities have seen globally-significant levels of internal migration, there remain millions of acres of land which are subject to legal ownership and other restrictions. Under existing laws, 40 per cent of all the housing stock in China cannot be sold. The government’s pursuit of land reform will change this, and property ownership generally unlocks wealth.
China’s huge economy is continuing to grow at rates we can only wonder at, and is rebalancing as a consequence. The dragon will likely continue to breathe fire for some years to come.