This has come on the back of a slow-down in the Chinese GDP growth rate to 7.7% in Q1 this year, with “secondary industry” (which in Chinese accounts includes mining as well as industrial production and construction) slowing to only 7.8%. Should we be worried?
Is this the start of the collapse in Chinese growth which has concerned many economists for the best part of a decade?
The overall rate of GDP growth may have fallen but the quality may at last be finally improving. Service output has been steadily accelerating since last year and has now reached 8.3% year on year, overtaking secondary industry for the first time.
Retail sales were one of the few parts of the latest set of Chinese data to surprise to the upside. This was partly due to households taking advantage of cheaper gold prices to boost purchases of jewellery. China tends to exclude jewellery and focus on components such as dining out.
However, “mom and pop” restaurant sales tend to get under-reported and the survey is influenced by the larger restaurants suffering from a clamp down on “official gluttony”. Li Keqiang and Xi Jinping have been keen to clamp down on anything that looks bad and expensive banquets attended by Government officials have been high up the list.
Slowdown pros
A slowdown in Chinese GDP growth is something that is both inevitable and desirable. China has enjoyed a demographic dividend of a growing educated workforce, but the population of working age has been slowing.
China can only therefore keep growing at a rapid pace either if it continues to deepen its capital stock or improves total factor productivity growth (TFP): how much output can be improved by using the same set of inputs but in a more efficient manner. Calculating how much of Chinese growth has come from capital accumulation and how much has come from TFP is difficult.
Estimates of the capital stock are based on annual investment data but the results vary enormously depending on assumptions about the rate of depreciation. A World Bank study estimated TFP growth was 3% p.a. but has slowed to 2.3% p.a. this decade. The World Bank estimates that “capital deepening” and “human capital (i.e. a better educated work force) can still add 5.2% which will mean output per worker can grow at 7.5% p.a. in the second half of this decade (overall GDP growth will be 7%).
Far from collapse
However, there are concerns that China may be investing too much already and ever greater amounts of capital worker will just collapse the return of capital in China. Trend growth slowing from 7.5% to 6% by the end of this decade is a more reasonable view. It certainly represents a marked slowdown from the past, but this isn’t a growth collapse either.
Yesterday’s data should therefore reassure us. If China was growing too fast we know it would only have to slow even more later on. A “soft landing” is in progress.
