The latest reading from Fathom’s China Momentum Indicator (CMI 2.0) combines the first two months of the year, a period for which the data are often patchy and notoriously difficult to interpret due to Chinese New Year. For now though, it appears that China’s policymakers are continuing to prioritise growth over reform, cushioning the slowdown by resorting to old-model growth tactics.
The usual data discrepancies around this time of year, combined with the construction of our CMI 2.0, mean that the second half of 2018 now looks weaker than in December’s print, but the broad story remains the same. Indeed, China’s economy began to slow in late 2017, but a return to old-model growth tactics has cushioned the slowdown, with the latest CMI 2.0 reading holding steady at December’s downwardly revised figure of 5.3%.
This prioritisation of growth over reform is highlighted by our proprietary China Growth Strategy index, recently updated to 2018 and presented to clients in our Q1 Global Economic and Markets Outlook. Indeed, with efforts to promote both high-tech and consumer-driven growth flopping, policymakers have entered a new chapter in their love–hate relationship with credit, backtracking on the deleveraging which took place in 2017 to early 2018.
A reflection of the juggling act required to transition the Chinese economy onto a more sustainable growth path, episodes like this — in which half-hearted attempts to rebalance weigh on growth and are subsequently abandoned — are probably here to stay. And although leaning on old-model tactics, such as credit-fuelled investment, supports near-term growth, investment in unproductive assets progressively takes its toll, undermining the growth potential of an economy.
One symptom of this is the spare capacity in China’s labour market. Indeed, our proprietary China Underemployment Indicator (CUI) suggests that around 14% of China’s labour force is underutilised or unemployed, performing roles with relatively little or no economic return. This is in contrast to the official urban jobless rate, which is just shy of 4% and has barely budged over the last decade.
Essentially, China is getting less bang for its buck.
With private consumption unlikely to pick up the slack, we expect growth to slow further from here, piling pressure on China’s policymakers to find a ‘new growth model’ that works. Until then, determined to maintain social stability, China’s efforts to rebalance will remain half-hearted.
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