Evidence is mounting that the Chinese authorities may be willing to accept slower growth than was typical in the past. Hints about this came from the absence of an annual average growth target in China’s 14th Five-Year Plan for 2021-25, and with the setting of a growth target of ‘above 6%’ for 2021. The latter will appear quite high to many, particularly observers in western advanced economies; but it is not a hard target for China to achieve, given favourable base effects and the tailwinds as developed economies emerge from the COVID-19 pandemic.
Data over the past several months have pointed to a clear slowing in Chinese economic momentum. Industrial production and retail sales grew at just 5.3% and 2.5% on a year-on-year basis in August and business confidence has also been in retreat (chart below). Small spikes in Covid-19 cases have contributed to the slowing in growth, as the authorities’ zero-tolerance approach results in strict containment measures. Indeed, the latter explain the outsized fall in sentiment in the non-manufacturing sector in August.
Despite the softening in the economy, we have not seen much in the way of policy-easing. In addition, China’s central government appears reluctant to come to the aid of the troubled real-estate developer Evergrande, despite the potential for negative spillovers to housing market activity, financial markets and consumer and business confidence. The purchasing managers’ surveys due on Thursday will provide greater insight into the impact Evergrande’s troubles are having on activity.
The seemingly greater tolerance for lower growth is influenced by several factors, including concern about the large negative side effects associated with China’s traditional growth model, attempts to reduce moral hazard in the financial system and President Xi’s focus on achieving ‘Common Prosperity’. Indeed, strong growth since the Great Financial Crisis came at the expense of soaring debt levels, with non-financial debt over 200% of GDP in Q1 2021 according to the Bank of International Settlements (BIS). Moreover, soaring house prices have greatly exacerbated inequality. Strikingly, China’s average house price-to-disposable income ratio was around 18 in 2020 — far higher than in the US and UK.
The authorities are however likely to be uncomfortable if growth slows too much at the present time. Even before the escalating woes surrounding Evergrande, Fathom believed that policy easing was on the horizon in China. Mr Xi will not want to take too many chances with the economy ahead of next year’s all important 20th National Congress, where he is intent on securing a third term.
Over the coming decade, investors should get used to seeing much slower Chinese growth on average than they have been familiar with. The government’s increasingly interventionist approach in domestic industries is not without consequence, and risks stifling innovation. In our latest Global Economic and Market Outlook, shared with clients over recent weeks, we highlight the fact that only the most democratic nations tend to move beyond 50% of US GDP per capita – resource-rich commodities exporters are the only exception.
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