Growth in China's secondary sector, its biggest driver of the economy's boom over the last two decades, is falling like a bag of hammers. China's service sector, now the largest portion of its economy, is growing strong. The rapidly declining growth in the secondary sector - the making and building of tangible things - has caused many China watchers to argue that the hard landing has arrived, and Beijing is hiding the true growth rate. The truth is much simpler: China's policy directed slowdown is highly uneven due to parallel efforts to rebalance the economy away from industry and investment. Therefore, measuring China's overall output by counting rail cars and electricity usage has become insufficient for getting a picture of the entire economy.
The transition to a more balanced economy that everyone has been advocating and policymakers were avoiding for years is taking place in China. The change is not moving in a straight line or as smooth as many would like it to go, but the transition is happening according to 2015 data. As a result, the targeted slowdown to a lower growth rate is highly uneven. The making and building of tangible things - the secondary sector - is slowing much faster than the overall economy. Services and consumption, on the other hand, continue to show strong growth, both nominally running around double-digit growth rates. Within China's 7% real GDP growth number, secondary growth has fallen significantly to 5.8%. Services are growing at a robust 8.9% (see the chart on the right).
More evidence of an uneven slowdown can be seen in the recent PMIs. The services PMI rose to 53.9, one of the highest numbers of the year. Manufacturing PMI modestly declined to 50 from an already weak number.
Category as a % of China's Total Imports
The uneven nature of China's slowdown presents a problem for the rest of the world's economies and exporters. China import demand is dominated by commodities and industrial machinery (see chart below). China is already the factory floor for the world's consumer goods, and consumer goods import demand is very limited for now (see my trade maps for more info). So, more consumption in the short-term and a strong service sector have far fewer beneficiaries outside of China relative to the pain felt from the falling industrial and construction sectors that make up secondary growth. For the majority of countries and firms dependent on China's once insatiable demand for commodities and machinery, growth has fallen effectively to 5.8% already. That is a very low growth rate considering much of the world's structural export capacity was built over the last decade to accommodate secondary growth in the double-digits. The latest results on import demand can be seen here: http://laohueconomics.com/trade/
Service growth
The service sector's importance to China's economy is moving higher. So far this year services represent 49.5% of GDP. That is up almost a full percent from last year, but still a low number relative to peers. Services constitute more than 60% of GDP in South Korea, Brazil, Turkey, Poland, and a number of other developing countries. In Singapore, the number is above 70%. So, the rebalancing has a long way to go, but the pace has accelerated. As a result, many light industries with linkages to services are doing quite well (see charts on the right).
China's primary economic goal is to maintain employment stability. The numbers indicate that China can withstand a slowdown in its traditional engines of growth, industry and investment, as long as the fast-growing service sector picks up the job creation slack.
Employment in the service sector rose nearly 10 million jobs per year for the 5 years to 2013 (the latest data). The creation of 10 million net new jobs is Beijing's target for 2015. According to the New York Times, around 300 million people now work in services, accounting for 40% of China's workforce. Job creation in the service sector has been absorbing much of the rural labor migration as the agriculture sector workforce continues to rapidly shrink.
Job creation and its ability to lift living standards and increase wages is a key variable in the legitimacy of the country's political model. So, as long as the service sector continues to expand quickly, supporting employment stability, China can withstand a weakening secondary industry for some time.
The secondary sector and the slowdown
A slowdown in the secondary sector has been in the pipeline for years. Investment in China's industry and construction sectors have decelerated significantly over the last few years (see the chart on the right). Heavy industry, mining, and industries with overcapacity (steelmaking for example) have seen the quickest slowdowns. State-owned investment continues to lag private investment. Much of the slowdown in investment, which in turn lead to slowing output, has been directed by Beijing in the form of years of restrictive monetary conditions and a clampdown on local financing vehicles. The vacuum caused by an investment slowdown by local governments, China's primary driver of infrastructure investment, has not yet been filled by Beijing. The slower local investment, whether intentional or not, has the benefits of reducing local debt, reining in overcapacity, and curbing pollution. All of these changes come at the expense of reduced import demand from a slowing secondary sector.
With Beijing keeping service and consumption growth robust in order to facilitate a rebalance, the secondary sector will be used as the main lever to allow overall growth to moderate. China could possibly lower its GDP growth target to 6.5% within the next couple of years. If so, the secondary sector could slow to below 5%.
There are a number of structural reforms China needs to do in order to keep the economy on track in the long-term. Whether Beijing will be successful at all or most is up for debate. But, for now the data shows that the long-awaited transition to a more balanced economy is unfolding, and a number of China-dependant firms and countries are feeling the effects. For many, an uneven soft landing feels like a hard landing. This trend will continue in the long-term.
The good news is that in the short-term, H2 2015 growth will benefit from a cyclical pickup as housing improves and fiscal stimulus finally gets deployed (see my posting Quick Update: Anticipated Fiscal Boost On Its Way? for details). The bad news is that secondary industry will probably never see growth above 6% after this year, even as GDP goes through a stable slowdown.
经济硬着陆
中国硬着陆
软着陆