It isn’t so many years since I used to berate the denizens of the financial markets for their lack of interest in the economy that had so much influence on ours: China. How things have changed. So has China.
After averaging growth of 10 per cent a year for 30 years, China’s economy is now struggling to achieve its reduced target of 7.5 per cent. The financial-market participants’ role has been to watch on with concern.
And this week comes news that, though the International Monetary Fund sees China coming close to target this year, it expects it to slow to 7.1 per cent growth in 2015 and slow further in following years.
More surprisingly, the fund says China should slow down to give it a chance to work on its big problems, rapidly growing debt and a rapidly contracting real estate market. Fumble those and growth could be even lower.
But while so many of us have been so focused on China’s difficulty maintaining its rate of growth, we’ve lost sight of how big it is and how fast it’s still growing compared with the rest of us.
Compared, say, with the world’s biggest economy, the United States. Except that, according to the calculations of Euromonitor International, China will overtake the US this year. That’s when you compare the two economies using “purchasing-power parity”, which makes allowance for the fact that one US dollar buys a lot more in China than it does in the land of the free.
With China biggest and the US second, then come India, Japan, Germany, Russia and Brazil. We come in at 17th, not far behind Indonesia. The world certainly is changing.
Of course, the Chinese and American economies remain very different. China is big because of its much bigger population - 1.4 billion versus 300 million. Its income per person remains a fraction of America’s. A not unrelated fact is that America’s productivity (measured as GDP per worker) is more than nine times higher than China’s.
And the two countries’ industry structure is also very different. Agriculture contributes 10 per cent to gross domestic product in China, but just 1 per cent in the US. But get this: it accounts for almost a third of the workforce, compared with just 1.4 per cent in the US.
Manufacturing makes up for 30 per cent of China’s GDP, but only 13 per cent of America’s. That tells us a lot about why China’s rise, and the growth in its exports of manufactures, has affected so many other countries as well as maintaining downward pressure on world prices.
But the biggest difference between the two economies is their relative emphases on consumption and investment. Euromonitor International estimates that this year private consumption will account for 68 per cent of GDP in the US, compared with 37 per cent in China.
Here, however, we get to the really important news: the Chinese authorities have embarked on a process of “rebalancing” the economy, increasing consumer spending and domestic demand and reducing the roles of exports and investment in heavy industry.
The Economist notes that consumer spending has already begun its expansion, with its share of GDP rising from less than 35 per cent in 2010 to more than 36 per cent last year. And this year it has accounted for more than half the growth in GDP.
A big reason for stronger consumer spending is rapid growth in wages. Get this one: over the five years to 2013, real wages in manufacturing rose by about 2 per cent in the US, but by 45 per cent in China. As always happens, the benefits of economic development do flow eventually to ordinary workers.
This strong growth consumption involves faster growth in the services sector, with manufacturing’s share of GDP having peaked at almost a third in 2007.
This structural change means people following the ups and downs of the Chinese economy ought to be following a different set of indicators, as Peter Cai of China Spectator noted last week with help from Guan Qingyou, an economist at Minsheng Securities.
Cai says the main reason Chinese policymakers care so much about the rate of growth in GDP is their belief that the economy needs to grow by at least 7.2 per cent to absorb 10 million new entrants to the labour market each year.
But this correlation has been breaking down since 2010. Slower growth in GDP has not led to weaker job creation. Gaun suggests this is because the expanding services sector has a greater capacity to absorb new jobseekers.
More fundamentally, China seems to be approaching its “Lewis turning-point”, where a developing country runs out of its supply of surplus rural labour. This would also help explain the rising real wages.
Financial market participants focus on the growth in “industrial production” (manufacturing, mining and utilities) as a predictor of GDP growth, and on the manufacturing PMI (purchasing managers’ index) as a predictor of industrial production.
But Cai says the strong correlation between industrial production and GDP is breaking down because the services sector is growing a lot faster than the industrial sector. Last year, for instance, the services sector contributed 47 per cent of the annual growth in GDP, whereas the industrial sector contributed less than 40 per cent.
So, it's better to focus on the services sector PMI.
A big problem for China-watchers is that you don’t know how much faith to put in official statistics. Earlier in his career, Premier Li Keqiang let it be known that he, too, had his doubts. So he focused on railway freight volumes, electricity consumption and bank lending as offering a better guide.
Now others have developed a “Li Keqiang index”. But here, too, Guan argues that its reliability has declined, because of changes in the structure of industrial electricity use and changes in financing.
China is changing.
Ross Gittins is the economics editor.