27 October 2016
The growth of railway passenger traffic reflects the boom in domestic tourism and personal travel in mainland China. Photo: epa
The growth of railway passenger traffic reflects the boom in domestic tourism and personal travel in mainland China. Photo: epa

Challenges abound, but China’s new economy is underappreciated

It is a maxim of today’s financial markets that we cannot trust Chinese economic data because the official statistics distort the truth by painting an overly benign picture.

Consider this: the Chinese government tells us that the economy grows at 7 percent a year.

But major macroeconomic indicators, including growth in industrial output, electricity consumption and freight traffic only grow at 3-4 percent, and the output of industrial materials such as steel and cement actually contracts.

Hence, the skeptics conclude that the official statistics lie about the true picture.

The irony is that these skeptics all think they know about the structural rebalancing of the Chinese economy, but they fail to recognize it when they see it.

The problem is that the traditional major economic indicators we are all accustomed to tracking do not capture the structural changes in the Chinese economy.

So, when one only focuses on the old Chinese economy, which has entered a structural decline, of course the traditional macroeconomic data paints a dire economic picture.

The old Chinese economy that relies on exports and industrial expansion has suffered an economic hard landing owing to a structural rebalancing toward a new economy that relies on services and household consumption.

This can be seen in the overtaking of the secondary sector by the fast-growing tertiary sector in 2013.

What’s more, industrialization has been migrating westward, suggesting a redistribution of growth from the rich east to the poor central and western regions.

Deepening industrialization in the inland provinces also generates an inherent growth momentum by tapping unused and cheaper resources.

The industrial migration process also implies division of labor between the wealthy but more costly eastern part of the country — which is now focusing on higher-value-added tertiary production — and the less-developed and cheaper inland provinces — which are taking over manufacturing and industrial production.

This rebalancing process should support a medium-term national economic growth rate much higher than the 3-4 percent rates that the pessimists see when focusing on the contraction of the old economy.

Meanwhile, evidence shows that the new economy has been growing briskly.

A notable example is the growth of railway passenger traffic, which is related to the booming new sector of domestic tourism and personal travel.

It has been growing at double-digit percentage rates, compared with a steady decline in the growth of railway freight traffic, which is related to the old economy involving transporting industrial goods and materials.

New forms of consumption, such as online shopping, banking, booking for journeys and movie-going, have been rising at more than 30 percent a year.

These new spending activities are not even included in the traditional official retail sales data.

However, the strength of the new economy has, so far, not been sufficient to offset the contraction in the old economy.

Indeed, growth challenges abound.

For starters, the shift from heavy industry to consumption implies less output per worker and less control by the central government in boosting output.

Meanwhile, the urgent need to improve air and water quality will impede growth.

The ongoing anti-corruption campaign will continue to delay decision making and inhibit aggregate spending.

Finally, China’s working population has started to contract, thanks to the one-child policy.

The recent relaxation of the policy to allow two children per couple will take at least 16 years to produce any positive effect on the working population, but there is no guarantee that the new policy will work, as it depends on whether Chinese couples want two children.

In the medium term, increasing the effective labor force will require moving workers from the rural to the urban areas.

This makes urbanization a top policy priority.

However, to facilitate urbanization, Beijing needs to dismantle migration barriers imposed by the household registration, or hukou, system.

It will also need land reform to allow farmers to sell their land rights at fair market prices, so as to enable and incentivize them to move to the cities.

But these are deep-rooted changes that will take a long time to implement.

China also has to deal with a variety of short-term macroeconomic problems, including excess capacity, local government debt and bad bank loans.

Fortunately, the authorities have recognized these problems and started to deal with them.

In a nutshell, we cannot trust China’s economic data because the traditional indicators do not capture the changing structure of the Chinese economy.

China’s economy will not grow as strongly in the future as it did in the past, but it will not slow to 3-4 percent so soon.

The medium-term growth rate will likely be around 6-7 percent a year, and the structural rebalancing process will deliver a new growth model of rising consumer spending.

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Senior economist of BNP Paribas Investment Partners (Asia) Ltd. and author of “China’s Impossible Trinity – The Structural Challenges to the Chinese Dream”

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