China’s economic growth tumbled to a 26-year low of 6.7 percent last year. Traditional economic theory suggests that it usually takes a long time for an economy to reaccelerate.
Nevertheless, the nation’s economy has shown great resilience since the start of the year. The gross domestic product has expanded by 6.9 percent in the first half, up 0.2 percentage points from last year.
Indicators such as employment, consumption, commodity prices, housing and stock market all have pointed to strong growth momentum.
Ren Zeping, chief economist at Beijing-based Founder Securities, put forward a “new cycle theory” at the beginning of this year, which might help explain the situation.
Ren coined the term “new cycle”, which basically covers three main points.
First, the Chinese government has started to cut back excessive capacity in the manufacturing sector since 2015, and the efforts have started to pay off. The efficiency and profitability in metals, coal, cement and paper making industries have risen.
Also, many corporates have been reducing their inventory level for the last couple of years due to tightening liquidity and gloomy economic outlook. The inventory level has dropped to the bottom, and it’s time for them to replenish stock.
Last but least, economic recovery in the US and Europe has revived external demand.
China’s economy may enjoy a short boom period on these three factors, Ren said.
Economic growth has rebounded quickly after his comments.
Ren also shared his bullish view on A shares. “I’m strategically positive about A shares, and there might be a structural bull market,” he said in a speech last week.
The question is how long this “new cycle” can sustain?
Already, China posted a set of disappointing data for August. Fixed-asset investment grew 7.8 percent in January-August from a year earlier, compared with market estimates of 8.2 percent. It slowed from 8.3 percent growth in January-July.
Meanwhile, industrial output rose 6 percent in August year on year, slower than the market expectation of 6.6 percent. Retail sales rose 10.1 percent in August from the year before, down from a 10.4 percent growth the month before.
Data signals the nation’s economic growth is running out of steam from investment, production to consumption.
Frankly speaking, a single month of economic data may not tell too much. Also, bad weather may have weighed on the manufacturing sector in Pearl River Delta.
Nevertheless, if the growth slowdown extended into September, the so-called “new cycle” may come to an abrupt end.
Some believe China’s GDP growth may stabilize above 6 percent for a long period of time, until its GDP per capita reaches above US$12,000.
However, pessimists see more economic pains looming ahead.
Let’s wait and see how Beijing would respond in the upcoming 19th Party Congress.
This article appeared in the Hong Kong Economic Journal on Sept. 15
Translation by Julie Zhu
[Chinese version 中文版]
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