COMMENTARY: China's Slowdown Now Sparking Real Concern

With economic growth hitting a 29-year low, the Chinese government is taking more concrete measures to spur consumer spending to transform the economy.

Mark Melnicoe
    Feb 09, 2019 4:25 AM  PT
COMMENTARY: China's Slowdown Now Sparking Real Concern
author: Mark Melnicoe   

You might look at China's 6.6 percent GDP growth in 2018 and ask, "What's the problem?" After all, that was more than double the U.S. performance, which itself doubled Europe's rate.

Yet plenty of people are worried - from American company executives seeing a profit squeeze to Chinese workers seeing their jobs threatened. It wasn't that long ago that China saw annual double-digit growth – a performance that turned it from a poor country in 1980 into an economic powerhouse. Last year's 6.6 percent was the slowest growth in 29 years.

Now, the country of 1.4 billion people, which has propelled much of the world's economic growth for the past decade, stands at a crossroads. China's leaders are presiding over the most massive urbanization the world has ever seen, with hundreds of millions of people having moved from rural villages to megacities, such as Shanghai, Beijing, and Guangzhou.

Those migrant workers have taken jobs in factories, restaurants, office towers, and industrial parks. Millions more are university graduates seeking positions as scientists, engineers, and teachers. The Communist Party stakes its legitimacy on being able to take care of China's workers, and there is evidence of increasing worker unrest.

Worker Unrest

Chinese firms saw a meager net profit rise of 3.9 percent in the third quarter of last year, compared with jumps of 20-55 percent seen in each quarter for the past two years, according to a Reuters analysis of earnings for 1,950 firms listed in Shanghai and Shenzhen.

That is the kind of thing that puts a direct squeeze on workers, who are suddenly feeling vulnerable. The New York Times reported this week that "thousands of Chinese workers are holding small-scale protests and strikes to fight efforts by businesses to withhold compensation and cut hours."

It cited the arrests of several activists in the southern metropolis of Shenzhen and said the authorities are trying to rein in the protests.

"Such protests are a glaring example of the challenges the sharp economic slowdown poses to China's top leader, Xi Jinping, who has aggressively promoted the ‘Chinese dream,' his signature vision of greater wealth and a fairer society," the Times said.

Action Needed

Pressure on China's economy is coming from several places, including fast-mounting household and local government debt, the trade war with the U.S., overcapacity in some industries, and highly inefficient state-owned enterprises.

If workers lose confidence, they will stop their free-spending ways. That is already being seen in the vehicle market, which actually declined last year for the first time in almost three decades.

As a result, China's State Council and its main economic planning body, the National Development and Reform Commission, recently released an action plan to boost consumer spending. In the U.S., consumers account for 68 percent of GDP. In China, that number is just under 40 percent, and the central planners want a big improvement, seeing that as the way to move to a more sustainable model of growth.

"As China continues to face issues of rapid urbanization and aging, services such as health care, elder care, and child care are now assuming a larger proportion of domestic spending and this is reflected in the 2019 Domestic Consumption Policy Plan, which focuses on expanding and improving the delivery of these services," Dezan Shira and Associates, a China consulting firm, wrote this week in a briefing.

It said the new policy targets five areas, aimed at boosting five sectors:

  • Automobile sales: Promoting auto upgrades, accelerating the prosperity of the used-car market, and subsidizing new cars that meet emission standards, such as new energy vehicles.

  • Urban consumption: Renewing of old department stores and developing the real estate rental market as well as child and elderly care services.

  • Rural consumption: Developing online shopping, e-commerce, and tourism to stimulate consumption in rural areas, as well as launching campaigns on product quality to improve market environment.

  • New consumption: Strengthening sales of green and smart home appliances.

  • Quality consumption: Improving access to network and communications infrastructure, expanding and upgrading shopping centers and streets, parking lots and utilities, as well as optimizing the consumer market environment through tax rebates service outlets.

Current Concerns are Long Term

That is a tall order, and these measures follow other recent moves to induce consumers to spend more. They include a major revamp of the individual income tax code (helping lower- and middle-income taxpayers), tariff cuts, and loosening bank restrictions so they can more freely lend. They are also continuing to spend big on infrastructure – roads, bridges, railways, and a huge new city near Beijing.

Longer term, China retains a pair of hugely ambitious plans. One is "Made in China 2025," a high-tech industrialization program that targets 10 key industries of the future for global leadership.

The other is the "Belt and Road Initiative," in which China is building ports, railways, highways, and other infrastructure across its vast west and in other countries. The goal is to resurrect the ancient Silk Road to facilitate much more trade across Asia to Europe and Africa.

In the end, maybe the current slowdown will be a mere bump in the road to greater prosperity for China. Some analysts see growth at a low ebb, with a pickup in the second half of this year.

While the trade war is getting most of the headlines right now, it's these longer-term plans that will go further in determining China's economic fate.