CHINA: Decrease of Growth Potential and Structural Changes

The GDP growth further receded to 6,6% in 2018 hindered by the slowdown of manufacturing and construction but sustained by the services’ sector development. The gradual decrease in GDP-growth observed in the last years follows the decline of its growth potential. The government pursues a yearly GDP growth rate (6%- 6.5%), the lowest of the last decades. Long-term economic stability and environmental soundness are the other two priorities. Consumers’ confidence and the growth of private consumption remain fundamentally solid thanks to continuous income growth and relatively sound households’ balance sheets. However, consumption shows signs of slowdown such as the drastic decrease of retail sales of cars and smart phones and the import decrease of 7,6% (y/y) recorded in December 2018. In ten years, the services sector overtook the industry sector in terms of added value.

The relative loss of weight of industry and the structural change in the domestic demand could have durable negative consequences for the exporting countries towards China. Exports (Dec. ’18: -4.4% y/y) are suffering from the trade tensions with the US. To minimize the threat of a sudden loss of economic momentum, the government anticipates infrastructure projects and plans corporate tax and value-added tax cuts. Low productivity state-owned corporate groups are not profitable but are still considered politically and socially relevant and therefore sustained by the government through credits, triggering credits expansion and excess of corporate debts. After the tightening of financial market regulations in 2016 leading to a slowdown in credit growth and in activity in real estate and construction sectors, the People’s Bank of China eased its monetary policy slightly again in 2018, with a decline of reserve requirement ratio and of money market interest rates.

April 2019