Chinese Economy: Stable and Sound? Or Slowing Dangerously?

The first quarter of 2014 has seen the Chinese economy slow further to 7.4% year-on-year. China’s major trade partners will be looking on anxiously. Despite the National Bureau of Statistics announcing that growth is “Stable and Sound” is a major stimulus on the cards?

First of all the facts:

• China has released its GDP figures for the first quarter. Q1 2014 saw GDP grow by 7.4% year-on-year, a slowdown from Q4 2013’s 7.7% and the lowest rate of growth since Q3 2012;

Real GDP Growth Q1 2010 – Q1 2014

Source: Euromonitor International from National Statistics

Note: Data are non-seasonally adjusted

• Beneath this headline figure, the service sector saw the strongest growth at 7.8% year-on-year;
• Disposable income in both urban and rural areas also saw strong growth in the first quarter with annual real increases of 9.8% and 12.3% respectively.

What About China’s Trade Partners?

There has been a lot written about the impact on China’s trade partners, particularly commodity exporters. As well as some neighbouring Asian countries, China is the chief export partner of Chile, Peru and Australia and also of Sub-Saharan Africa taken as a whole. China’s imports in 2013 accounted for 10.6% of all global imports. Yet the impact of a slowdown on China’s trading partners is not clear cut – it depends on the composition of trade, and the underlying trends beneath China’s GDP growth and the partner’s reliance on China’s commodity-intensive form of growth as well as the nature and scale of the indirect impact on commodity prices. In short, the greater the degree of diversity the better.

 China’s Major Trade Partners: 2013

Source: International Monetary Fund, Direction of Trade Statistics

Will There be a Major Stimulus in 2014?

The government has announced a target of real GDP growth of 7.5% for 2014, and the Q1 figure is just about in line with this. The government’s tolerance for growth slipping significantly below 7.5% is likely to be limited – because 7.5% represents the slowest rate of growth since 1990. In fact, the government has already announced a mini stimulus, which involves bringing forward infrastructure projects and offering tax breaks for business. If income growth slows and employment creation stalls, then a stimulus is more probable. However any stimulus is likely to be targeted to avoid a further credit boom and added upwards pressure on real estate prices. For the moment, all that can be said is “watch this space”.