Key economic data from November show the once break-neck pace of China’s economic growth has continued to slow.

Economic Data Show a Slowing Chinese Economy

The latest economic data from November shows that the pace of China’s economic growth has continued to slow. Retail sales grew 8.1% in November, the slowest rate of growth in 15 years, according to data from the National Bureau of Statistics. Export growth slumped to 5.4% in November, from 15.5% in October, according to China’s General Administration of Customs. Sluggish demand for Chinese products in export markets slowed industrial production growth, which expanded only 5.4% in November – the slowest rate of growth in a decade. Domestic sales of automobiles also fell 18% year-over-year in November. The China Association of Automobile Manufacturers expects domestic sales to stop expanding in 2019, further slowing retail sales growth as spending on big-ticket items shrinks. Given that leading economic indicators (retail sales and industrial activity) are growing more slowly, and the effects of the China-US trade war, which we expect to continue into the coming quarters, we expect the pace of economic growth in China will continue to slow in the first half of 2019. Government-led think tank Chinese Academy of Social Sciences estimated China’s economy will grow more slowly, at 6.3% next year, compared with this year’s target of 6.5%.

Source: National Bureau of Statistics/Coresight Research

Consumption Become Less Effective in Propelling Growth

China has for years been pursuing a policy of stimulating domestic demand to drive economic growth and this has been working. Consumer goods sales as a share of the country’s GDP has risen steadily from 38.3% in 2010 to 44.3% in 2017, according to the National Bureau of Statistics. With China’s economy now more dependent on domestic consumption, slowing retail sales can have a real impact on the overall economy.

Mixed Effects of Curbing Debts

The slowing pace of economic growth is also the result of China’s efforts to curb debt, which has slowed spending on infrastructure investment – which has historically been used as a tool to grow GDP. Tightened credit policies have hindered growth by slowing fixed-asset investment. China’s year-over-year fixed-asset investment growth slowed to 5.9% in November, compared to 7.9% growth in February.

Source: National Bureau of Statistics/Investing.com/Coresight Research

Government Initiatives to Stimulate Economy in Place

The Chinese government has responded with new initiatives to stimulate the economy - especially given the uncertain outcome of the trade war with the US. The government has reformed the personal income tax regime, raising the minimum threshold above which wage earners need to pay tax, meaning around 100 million people now do not need to pay income tax - putting more disposable income into consumers’ pockets. It has relaxed credit control by allowing banks to lend to small businesses and the People’s Bank of China, the country’s central bank, launched a new liquidity mechanism that allows banks to borrow cheaply to fund smaller businesses and private companies. It has also suspended the recently imposed additional duties of 25% on US-made vehicles and automotive parts for three months starting from January 1, which should stimulate consumption and also ease trade tensions with the US - which already are hurting China’s economy. All this said, a slower pace of economic growth should not be unusual, as China continues transforming its economy, seeking to climb the value-added chain from labor-intensive industries, investing in new technology, and developing a strong domestic economy.

Key Takeaways

Recent economic data from November shows the pace of China’s economy growth has continued to slow, largely as a result of slowing consumer demand and government efforts to rein in debt. The ongoing trade disagreement with the US has also likely hurt overall economic growth, and the central government is taking steps to respond such as pumping liquidity into the market through the People’s Bank of China and launching more preferential tax policies for individuals. In the long-term, China’s economy will continue its transition to becoming more value-added industries, although it may encounter some growing pains as a result of structural changes that will involve.