This week marked the 70th anniversary of the People’s Republic of China, but behind the grandeur of the celebrations is a sobering reality — China’s economy is slowing hard. This is according to our China Momentum Indicator (CMI), created as an alternative to the official and often questionably-on-target GDP data. As highlighted in the chart below, the index reported that China’s economy slowed to a three-year low of 4.2% in August.
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As we have explained to our clients, this is not a consequence of rebalancing; China abandoned its half-hearted attempt to reform the economy in a bid to cushion the slowdown last year. Recent measures of consumer appetite have reinforced this message. Retail sales, bank lending to households and aviation passenger numbers have all slowed since the end of 2017 (when our CMI last peaked), despite being key indicators of a more consumer-led economy.
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This pursuit of growth at the expense of reform is the wrong medicine; it will work for a time, but allocative inefficiencies and diminishing returns mean that unless something changes China is destined for perennially lower economic growth. This idea is reflected in our forecast, with the path into the future expected to be one that winds to and fro, with key events likely to intensify China’s prioritisation of growth, regardless of the long-term cost.
For example, we expect that in 2021, the centenary of the founding of the Chinese Communist Party (both a national celebration and a key milestone in the party’s plan to build a moderately prosperous or ‘Xiaokang’ society), growth will temporarily gain momentum. This could be through tried-and-tested growth tactics of credit-fuelled investments, which in the past have worked effectively in the short term to limit a slowdown. However, these efforts will only exacerbate existing imbalances and increase financial risk, dampening chances of long-term sustainable growth. As a consequence of this, we expect growth to return to trend and dip back down after the completion of 20th National Congress festivities in 2022.
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