Slow boat to China

GDP growth of 6.7% for most economies would be considered a great success. For China, a growth figure of 6.7%, released Monday, seems pedestrian relative to much higher rates of growth 10 years ago; when it was growing at 11.5%, almost twice as fast.

Chart 1: 10 years of China GDP

Soure: July 2018, Bloomberg

However, before rushing to judge this as a poor outcome, there are a few matters worth noting;

1. A growth rate of 6.7% is in line with expectations.

2. China’s economy today is much larger than it was 10 years ago i.e. apply 1% growth to a base number of 1000 and you get the same product from growth of 10% applied to 100.

3. Growth today is no longer being boosted by aggressive centrally directed bank lending.

4. The authorities have also taken action to restrict ‘shadow-bank’ lending (this is where unregulated entities sell ‘safe’ savings products with the money raised used to build bridges etc).

On balance, the growth level in the most recent quarter is healthy and no longer being fuelled by debt. Growth is, arguably, built on sounder foundations.

There is of course the ongoing debate as to whether economic data provided by the Chinese authorities should be believed. Western economists question whether data released are accurately calculated and perhaps subjected to manipulation. In recent years the Chinese authorities have, however, made attempts to improve data collation to help reduce wide spread scepticism. From what we hear from our manager partners, the growth numbers being released now appear sensible and are believable.

We should not forget that China was only admitted to the World Trade Organisation (WTO) in 2001. This was after a very lengthy negotiating process. Since that point China’s growth is nothing short of spectacular. Critics say the economic miracle we are seeing is swelled by cheap exports assisted by workers earning a low level of wages. We know that in the past this encouraged western companies to switch manufacturing plants to China thereby benefitting from much lower wage bills. However, the competitive edge gained has weakened over time. Other low wage economies joined the game of ‘offshoring’ by luring in western companies and taking away some of the benefits.

The central powers in charge in China are now looking at broadening out the country’s economic base. This means continuing to raise wages and stimulating consumption-led, domestic demand. Meanwhile, Donald Trump has China in his sights over trade. The massive surplus favouring China in its trade relations with the USA is, according to Mr Trump, evidence of anti-competitive barriers, behaviour and attitudes. China appears to want to solve this dispute bi-laterally but the rhetoric keeps being ratcheted up.

In the long run China’s effort to rebalance its economy will help resolve the trade issue, by slowing exports and encouraging a wider range of imports to satisfy increasing domestic consumption. However, Donald Trump appears to have a different approach when it comes to timing. It is like putting Trump in a US apache helicopter and President Xi in a Chinese junk and measuring the time taken by each mode of transport to cover the same distance. It is clear they both want to tackle the problem, but Trump has a greater sense of speed and urgency.