Don’t Count Out China…Yet

April 24th, 2014
in contributors

Investing Daily Article of the Week

by Ben Shepherd, Investing Daily

China released its first quarter gross domestic product (GDP) data on Wednesday and, once again, the pundits are bemoaning the country’s slowing pace of growth.

Follow up:

China reported that its economy grew by 7.4 percent in the first three months of 2014, on track to meet the government’s 7.5 percent target for the year. While the Chinese government seems comfortable with that number, commentators are quick to point out that GDP grew by 7.7 percent in each of the last two years and 9.3 percent in 2011.

Paradoxically, many of those same commentators have pointed out over the years that China’s double-digit growth simply wasn’t sustainable over the long haul, so this latest data shouldn’t be a huge surprise.

There were also positive signs in the GDP report, though that seemed to be getting overlooked. The government has said for some time now that its goal is to transition the country away from its focus on industrial exports to a more consumption-led economy.

Consequently, while factory output grew a slower than expected 8.8 percent in the first quarter, retail sales came in ahead of forecasts with a 12.2 percent increase, even as anti-corruption and “anti-extravagance” campaigns continue to unfold. The services sector as a whole posted positive growth, making up 49 percent of GDP, edging out the industrial sector by 4.1 percent.

The services sector is now the largest employer in China and is helping to boost overall job growth in the country, a key priority for the government. Growth in the sector is also in line with the government’s overall economic plan and is giving the economy some cushion. So while growth has slowed, there’s no reason to panic that the world’s growth engine is sputtering out.

At the same time, the government won’t be shy about applying stimulus as needed. The government already announced tax breaks for small- and mid-sized businesses earlier this month, a raft of infrastructure projects such as railways and support for lower-income housing construction. The current program is dwarfed by the $600 billion the government pumped into the economy in the wake of the 2008 crisis, but new programs are being applied much more strategically to stimulate growth in key economic areas.

The government also recently widened the trading band on its currency over the past couple of months, resulting in a devaluation to boost its sagging exporters. That’s once again raised tensions with the US, which not-so-subtly hinted that the country is a currency manipulator, but it should provide some benefit to international trade in the coming months.

The government also has a host of other measures it can turn to in the event that more stimulus is needed, including cutting the reserve requirement ratio (RRR) for its banks to boost lending, relaxing rules on forming businesses in key economic sectors or even outright spending programs. The RRR for rural banks has already been reduced to spark lending in the country’s poorer regions.

What this slower growth really means is that China will likely continue to promote growth in services by lowering taxes, making it easier to start service-oriented businesses and introducing flexibility in financial innovation. It will put off some of the tougher reforms though, especially a re-thinking of the huge state-owned enterprises that still largely dominate the economy.

 









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