China’s legendarily fast economic growth continues to slide from the double-digit days before 2011. Expansion of the world’s second-largest economy – a source of ups and downs for countries throughout the world – will probably ease by this year to 6.4% from an expected 6.8% last year, the World Bank says.
The reasons for this year’s slower growth, though still enviable by world standards, point to trends that China will need to grapple with beyond 2018: Its citizens have money but are investing less in businesses and real estate. Investment, worth an average 36% of GDP since 1960, is a serious economic engine.
“Chinese entrepreneurs still show little interest in investing, although the situation is quite different across sectors,” French investment bank Natixis says in a January 17 research note. “If the trend continues in 2018, the Chinese economy should keep on slowing down.”
Average incomes in China grew 7.4% in 2015 and 6.3% a year later. In the first quarter of 2017, disposable incomes outpaced economic growth, the state-run China Daily online says.
Chill in manufacturing
Factory capital for upstream production, which accounts for 72% of all manufacturing investment, faces a “clearly negative outlook” due to a lack of price growth momentum, Natixis says. Production overcapacity of items such as steel also limits the impetus for new investment.
Some reports, such as this one by the official Xinhua News Agency, still point to an upswing in manufacturing, though muted toward the end of the year.
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Some capital is migrating to services such as education and e-commerce. The Chinese government is pushing that trend to steer the broader economy toward non-polluting, knowledge-based industries. Services account for two-thirds of investment here, but the investment growth rate in services is slowing down as well, the bank’s senior greater China economist Xu Jianwei says.
Real estate retrenchment
China’s president said at the Communist Party congress in October that “housing is for living in, not for speculation.” That means quit buying just for resale, and what he says probably goes: Central and local government agencies exert a lot of control over China's ever-volatile property markets that are historically rife with speculation.
You can see why they care: Housing prices increased 10% per year from 2003 to 2014, and as of 2016 they were two to 10 times higher than construction costs, according to a Harvard University study. Combined construction of 100 billion square feet of residential property met also with a “large increase in the number of vacant homes,” the study says. Too much speculation runs the risk of a popped bubble and knock-on social instability.
Housing markets in larger cities have “cooled significantly,” with momentum in smaller cities slowing as well, Moody’s Analytics says in a research note made available this week. “This is in large part due to local government restrictions on multiple purchases and other measures,” the note says. The recovery in 2017 followed government measures to buy the excess inventory of developers, it adds.
A slowdown in residential property investment will have a knock-on effect for mining and other materials needed for new construction, Moody’s Analytics adds. That adds up to more pressure on the GDP, which is something the government won't want to deal with.
