BEIJING: International media reports have raised alarm bells that China’s 2nd quarter gross domestic product (GDP) hit 6.2 percent in year-on-year growth, hitting the lowest rate in the past 27 years. The news may sound shocking, but the country is in transition and Beijing had long expected the economy to slow down in the present day.
Yet it’s important to note that China has been hit hard by Sino-US trade tensions. China’s trade figures for the first half of the year were impacted by the White House’s US Trade Representative (USTR) raising tariffs on Chinese imports and not dropping them amid the ongoing trade truce.
Entering an era of transition
Although Beijing may claim the trade wars have not caused tremendous harm to the domestic economy, the disruptions in supply chains and on production lines have sparked renewed momentum to embark on key reforms for the country.
More than a decade ago, Beijing had already sought to boost consumption and services and shift away from an over-reliance on manufacturing and exports. The country was gradually shifting towards this direction, but it had taken Trump’s declaration of trade wars to accelerate the process.
‘New Normal’ now begins
China’s economy had been roaring uninterrupted with double-digit GDP annual growth rates from 2006 to 2010, according to China’s National Bureau of Statistics. That’s not sustainable, since it can lead to surging inflation rates, along with societal ills, which stem from rapid development, such as higher pollution levels, over-crowding and very risky business transactions that could spark a crash in the economy.
That explains why the Chinese government stood so reluctant to support and maintain sky-high GDP growth rates. Chinese President Xi Jinping was delivering speeches around the country a few years ago to alert citizens to the “New Normal,” and forecast slower economic growth rates.
“We must boost our confidence, adapt to the new normal condition based on the characteristics of China’s economic growth in the current phase and stay cool-minded,” Xinhua quotes Xi as saying in May 2014.
The message was clear: China’s boom times were over and the government would focus on a sustainable development mode to include raising living standards, improving social services, building more infrastructure and supporting supply-side reforms.
Lowering taxes; increasing consumption
Beijing had anticipated the economy would hit a rough patch this year as global trade tensions may go unresolved, geo-political turmoil over Brexit and continued instability in the emerging markets would pose a threat to China’s economic climate and conditions.
In response, the State Council (China’s Cabinet) announced major tax cuts RMB$2 trillion (US$291.bn) for this year, as well as the special bond issuance of bonds for local governments amounting to RMB2.15 trillion to spur infrastructure spending.
Beijing has gone “full Keynesian” by “priming the pump” to lower income tax rates for workers, raise social and infrastructure spending to keep money circulating. The strategy appears effective, since the GDP growth rate for the 2nd quarter could have been much lower.
Strengths and weaknesses to monitor
As China marches ahead on supply side reforms and sustainable development that will create winners and losers. The country’s manufacturing sector will witness more job losses for factory workers.
Manufacturers stand likely to transfer operations and supply chains overseas, particularly to southeast and south Asia regions in the short-term and mid-term future. Additionally, automated manufacturing is expected to play a more crucial role as many human laborers will get replaced by robots and smart technologies will decrease the requirement for hiring human beings on production lines.
Hence, many Chinese migrant workers flocking to the cities for employment may soon find themselves unemployed. Many migrants will return back to their rural hometowns as they bring back their savings to farming villages, which will inevitably result in an upsurge of new businesses opening up in rural areas of the country.
China’s science and hi-tech can also expect to enjoy remarkable growth as fintech investors will keep pouring in financing for startups and other firms in the Greater Bay Region (Guagnzhou Province, Hong Kong and Macau), Beijing, Shanghai and other cities that promote hi-tech hubs.
Global impact on China’s structural changes
By raising consumption, the nation’s consumers will find imports more attractive and they will seek to diversify their investments beyond real estate holdings. Beijing has pledged to open up banking and the financial services sector to more foreign-owned firms. Consequently, more Chinese will be buying and selling stocks in the Chinese and overseas stock markets.
Tax cuts have kept retail spending high, hitting 9.8 percent last June, year-on-year. Multinational retail firms can cash in by expanding sales outlets in the country. China’s slowdown in the manufacturing sector will boost industrial output in south and southeast Asia countries.
But US companies exporting goods, products and services to China will see dark days until Trump and Xi finally agree on signing a trade deal. Beijing will take tough measures against American companies, so long as trade wars are brewing both nations.
China’s long-term outlook
Don’t expect a dramatic rebound or double-digit annual GDP growth rates to return to China in the foreseeable future. The country will continue to experience a slow down in growth rates with a target range from 4 percent to 6 percent for the next few years ahead.
Nevertheless, the “new normal” in China’s growth patterns should not be deemed “shocking” and there’s no reason to feel any panic. Beijing is making adjustments to its current climate while the global economy will find ways to adapt to China’s slowdown as well.