The Essence Of China ‘New Normal’ Is Not Fast Growth
$GS, $UBS
The Chinese government is betting on tech-savvy shoppers and service sector growth to bolster a slowing economy.
Due to shrinking growth and changing demographics, China must swap its traditional growth model, one with its heavy reliance on exports and investment in real estate and factories for a new one based on consumer spending and innovation.
The economic transition has faced a number of problems, including a property market downturn, deflationary risk, stock market volatility, global financial turmoil, and added pressure on growth.
China set its Y 2015 economic growth target at “around 7%,” the lowest in more than a decade. The GDP for 1-H of Y 2015 hit the target, with growth up 7% from the same frame last year, according to data from the National Bureau of Statistics (NBS) released last Wednesday.
Doomsayers expect the slowdown to continue, leading to an eventual collapse.
China’s policymakers believe the economy is entering a new stage of slower but more resilient growth, which President Xi Jinping has called the “new normal.”
The essence of the “new normal” is not fast growth, but an improved economic structure that relies more on the services industry, consumption, and innovation.
The latest data show the services sector has become the biggest driver of economic growth, said Qu Hongbin, chief China economist at HSBC.
The sector expanded 8.4% in 1-H of this year, and accounted for 49.5% of GDP.
Wang Tao, chief China economist at UBS, noted the uptick in the services sector was helped by both a strong recovery in property sales in the first half and a buoyant equity market, which sent the key Shanghai stock index to a peak in mid-June and then crashed until supportive government measures helped arrest the slide.
Consumption also played a bigger role in boosting growth, accounting for 60% of GDP growth in 1-H, 5.7 percentage points higher than a year ago and almost 2X the contribution from investment.
“The demand structure is changing in line with our policy intentions, and the structure is getting better,” NBS spokesman Sheng Laiyun said at Wednesday’s press conference.
Online shoppers are helping steer the shift toward consumption. China’s e-Commerce market reached CNY13-T last year, and online sales surged 39.1% in 1-H of Y 2015, 3X faster than overall retail sales.
Output of hi-tech industries maintained double-digit growth in 1-H, nearly 5% higher than the overall industrial sector.
Analysts said that the economy is still recovering and it will take time for new growth engines to fully take over, so more easing measures are needed to counter a deceleration of traditional growth drivers and sustain the recovery.
Wang expects the government to enhance funding for infrastructure investment in 2-H, and further lower the benchmark interest rates.
“The government cannot relax its efforts to stabilize growth,” said Song Yu, Goldman Sachs/Gaohua senior China macro-economist, adding that policymakers must continue to boost domestic demand in order to achieve the full-year growth target.
Have a terrific weekend.
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Paul Ebleing
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