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The focus of both financial markets and macroeconomists on China’s growth outlook has
intensified. For one thing, it holds the key to the global economic outlook and hence asset
markets. The searing double digit growth rates of past decades (from 1980 to 2011) are
perhaps a thing of the past. The question now is whether its marked slowdown of the last
couple of years is bottoming out or whether a harder landing is in the offing. Besides
there is growing concern about the veracity of official data and that queers the pitch
further.
Economic growth has been steadily trending down in China since the beginning of this
decade. However, there was an inflection in the middle of 2018 post which the rate of
deceleration appears to have intensified. Real GDP growth slowed to 6.6% in 2018 - the
lowest rate since 1990 with steep drop in sales of cars and smartphones
(sectors/industries which showed resilience in the past) and flash warnings by various
companies of plunging sales and job cuts.
Chart 1: Chinese growth curve is pointing down
Source: National Bureau of Statistics of China (NBS) and HDFC Bank
However, there are nuances that need to be acknowledged. The Chinese
economy is not “unidimensional” as it was in the past when exports and
investments captured the essence of its performance. It could be argued that the
process of policy realignment and economic structural shift that has been under
way for the past decade demands a scrutiny of China that looks beyond the
headline prints and looks at a large array of sectors some of which might not be
in sync with the headline numbers.
Key takeaways
1. Firstly, the obvious --- deceleration in growth seems inevitable given that China is expanding from a
much larger base than a decade ago. For instance, nominal GDP increased by 8trn yuan ($1.2trn) in 2018,
well above the 5.1trn yuan added in 2007, when the economy grew at a whooping 14.2%. Seen this way,
one might argue that China’s 6.6% growth in 2018, amidst unpredictable trade shocks, in fact
demonstrated resilience and dynamism especially against an estimated global economic expansion of
3.7%.
2. Secondly, China’s deliberate structural shift from high-growth manufacturing/ exports led industries
to more sustainable but slower-growing services and consumption led industries (such as healthcare,
education, green energy etc.) needs to be understood in gauging its economic health. Thus inter-sector
differences are large and the performance of these “new” sectors need to be analyzed carefully instead of
fixating solely on topline macro growth. For instance, commodity exporters may view China as in sharp
slowdown cycle, whereas many online retailers or service providers view a healthier picture of the same
economy.
3. Besides, a clear understanding of economic rebalancing in China has to go beyond the broad
brushstrokes of investment and exports giving way to consumption and services. Thus it is
imperative to look deeper into the new drivers - consumption and services. For instance, while retail
sales growth moderated to single digit 9% in 2018 from 10.2% in 2017 (fuelling concerns of domestic
demand slowing down) online sales grew at a strong 24%. Similarly, while auto sales fell by 3% in 2018 –
first decline in about two decades, electric car sales jumped almost 62% in 2018.
4. Fourthly, while GDP remains an important indicator of the performance of the economy, it might not
tell the entire macro story. For example, amidst the ongoing economic transformation in China,
productivity growth may just be as important an index of macro-health as GDP growth. A recent study
by the China Development Research Foundation, suggest that trend for total factor productivity (TFP) in
China over the last five years has remained strong with growth stabilizing around 3%. The tertiary sector
has incidentally posted the highest growth rates among the sectors.
5. Lastly, the inter-regional differences of this vast economy need to be looked into. Province level data
suggest that locus of economic activity is shifting back to China’s eastern region from the previous
decade’s economic engines in the West and the Centre with significant shifts even within each region.
First things first: How reliable are the Chinese GDP numbers?
Skepticism over China’s official growth statistics has a long history. While we neither challenge or
agree to claims of Chinese data being fabricated, we remain cautious of reading too much into the
debate. We highlight two main reasons for our reservation.
• One, while there have been instances of data doctoring at the provincial level (especially in the
northeastern industrial rust belt provinces of Heilongjiang, Jilin, and Liaoning), it is important to note that
‘manipulation’ of regional data is likely to be filtered out to some degree at the aggregate level.
The GDP figure for China as a whole is calculated by the National Bureau of Statistics (NBS), which uses
metrics such as tax revenue, electricity consumption, exports and imports etc., which are possibly less
likely to be “fudged” to estimate the aggregate level data. Moreover, for some of the statistics on which
the GDP calculation is based on inputs supplied by regional governments, the NBS applies a discount to
the locally provided data. Encouragingly, starting this year, the NBS will also assume control of regional
data collection.
It is true that real GDP data looks somewhat dodgy given its uncanny smoothness and movement within a
relatively narrow range. A number of economists have long suspected the Chinese government of
manipulating the GDP deflator (an indicator of price movements that shows the difference between real and
nominal GDP) to make the real GDP growth look more stable. Given this, nominal GDP growth (which
expresses economic output in current prices, without adjusting for inflation) could perhaps be a better metric
to look at. Trend in nominal GDP growth over the past couple of years seems to be better reflective of both
the pace and direction of the Chinese economy.
Chart 2: Nominal GDP growth - better reflective of the pace and direction of the economy?
Source: National Bureau of Statistics of China (NBS) and HDFC Bank
• Secondly, various alternative private measures of Chinese GDP must be read with an equal amount of
caution as the official estimate. For one, some measures such as the Li Keqiang (LK) index (based on
growth in bank loans, electricity consumption and rail freight) may now not be too relevant for today’s
Chinese economy (which is less driven by these factors). A second reason is the obvious error “of
comparing apples to oranges” that analysts occasionally make. Comparing the current value of the LK
index based GDP with a past value based on the official series, thus, might be misleading
State of the economy – Growth could bottom out at 6 per cent
A sluggish 2018 - China's economic deceleration, which started in Q2 2018, became more apparent and
entrenched in the second half of the year. Overall, real GDP growth decelerated to 6.6% in 2018 - the lowest rate
since 1990 and half a percentage point lower than previous five-year average of 7.1%.
• The slowdown was to a large extent driven by China’s own deleveraging campaign which greatly
reduced access to bank lending. Companies (especially the smaller and mid-size ones) faced a severe
funding crunch.
• Another major fallout of the deleveraging exercise coupled with restrictive policies by the government
were significantly reduced transactions in the housing sector
• The worsening trade spat with the US, amidst a challenging domestic environment, added to the pain
particularly for the industrial sector.
• While consumption held up well making up 76.2% of 2018 growth, deterioration in overall consumer
sentiment (China's stock market ended with a loss of 28% in 2018) coupled with underlying shifts within
the sector led to patchy performance among sales of individual companies. For instance, auto sales saw
their first-ever decline in 2018.
• Even though the pace of service sector moderated too, it clearly stood out as an outperformer.
Chart 3: A sluggish 2018 for the Chinese economy
Source: NBS, Investing.com and HDFC Bank
Growth, however, likely to stay above 6% mark in 2019
Q1 2019 - Steady slowdown witnessed throughout 2018 prompted Chinese policy makers to ease both fiscal and monetary
policy selectively last year, as a result of which, the economy has, encouragingly, started showing signs of improvement
towards the end of Q1 2019.
• The economy expanded by 6.4% (y/y) in Q1 2019, beating consensus forecast of 6.3%.
• The Caixin/Markit Manufacturing PMI came in at 50.8 for March versus expectations of a 49.9 level.
Services PMI jumped to 54.4 from 51.1 in February 2019, beating market consensus of 52.3.
• Exports in March surged 14.2% (y/y) - the strongest growth in five months - after February’s 20.8%
plunge.
• Retail sales increased by 8.7%, faster than an 8.2% gain in February and above market expectations of an
8.4% growth.
Box 1: Stimulus measures announced by the Chinese authorities
Chart 4: Stimulus effect? - China’s recent economic data suggests signs of stability
Source: NBS, Bloomberg, Trading Economics. com, media reports and HDFC Bank
Outlook for remainder of 2019 – On the back of the government’s continued efforts to transition towards a more
sustainable economic model and external headwinds (trade spat with the US and slowing global demand), the Chinese
economy is expected to continue to soften in 2019 but stay above the 6.0% mark. 6.0 – 6.5% of real GDP growth remains our
base case. This is based on the assumption of a pick-up in domestic demand and further measured dose of fiscal/monetary
stimulus. Risks, however, persist with much depending on the outcome of ongoing trade conflicts, deleveraging efforts, and
the government’s ability to inject some flexibility in the economy without causing instability.
Special mention: While the risk of high debt levels spinning out of control persists (aggregate debt levels
surged to around 270% of GDP in 2018 from approximately 150% in 2008), the pace of debt accumulation has
slowed sharply. In 2015 it took more than four yuan of new credit to generate each yuan of incremental GDP. In
2018 that multiple fell to 2.5. As a result, growth in outstanding credit fell from as high as 20-25% in 2016 to
around 10% in 2018.
China has implemented a series of targeted monetary and fiscal measures since the 2H-2018 to
boost the economy 2018
• Tax cuts for R&D intensive companies, households and SMEs amounting to 1.3 tn yuan.
• Speed up in project approval for infrastructure spending - approved 189 projects, including projects in
the high-tech, energy, transportation and water conservation sectors.
• Cuts in Reserve Requirement Ratios (RRR) five times over the past year by the PBoC to boost credit to
the private sector particularly smaller firms. 2019
• Targeted budget deficit in 2019 is expected to widen to 2.8% of GDP from 2.6% in 2018.
• VAT rate cuts for the manufacturing sector (from 16% to 13%) and duty cuts for transportation
and construction (from 10% to 9%) amounting to 2 tn yuan.
• Plans to increase infrastructure spending - around 2.15 tn-yuan worth of local government
special bonds to meet spending needs for key projects.
• A clear mandate to large state-owned banks to increase loans to smaller businesses by more than 30% in
2019.
State of the economy – the big picture versus the small
While traditional economic indicators such as GDP growth rate, industrial production and retail sales present a
broad picture of the health of the economy, they do not paint a comprehensive evaluation of the Chinese
economy, which is undergoing a sweeping structural change - growth is slowing down but the quality and value
of the growth is getting upgraded. As part of this process, the slowdown in growth is being felt in certain
sectors/sub sectors while others continue to thrive – a shift which can’t be comprehended just by reading the
headline data. Missing this bigger picture, hence, may lead to a somewhat inaccurate assessment of how the
Chinese economy is shaping up. We list below some of these detailed nuances.
Evolving consumer demand: While a burgeoning middle class has helped the Chinese economy remain buoyant
in recent years, slowdown in retail sales growth in 2018 (to 9.0% from 10.2% in 2017) coupled with warnings
issued by various consumer driven companies triggered concerns over the strength of China’s consumer engine.
But beneath the slowdown lies significant changes in the patterns of consumption.
1) While headline retail sales growth have seen moderation to single digit growth, online sales grew at a
strong 24% in 2018. China has now around 829 million internet users (at the end of 2018) with a
penetration rate close to 60% and 70% of those using internet are now shopping and paying online. Not
being able to aptly emphasize on this huge share of the Chinese consumer market naturally leads to
overstatement of consumer pessimism.
2) Another major change seen in consumption pattern has been Chinese consumers’ growing preference for
green technology. This, for instance, has created an electric-vehicle boom over the past 2-3 years. Even as
car sales growth seen a deceleration in 2018, electric car sales in China jumped almost 62% to 1.3 million
vehicles and is expected to hit 1.6 million this year (as per China’s Association of Automobile
Manufacturers).
3) Importantly, 2018 moderation in headline retail sales did not take into account the fast-growing service
consumption, which stands at a whooping 49.5% of total consumer expenditure. According to the
China’s Ministry of Commerce, service consumption is likely to be a major driver of overall consumption
growth in the future. Some of the sectors that are likely to benefit more than others from this shift are
education, healthcare, tourism etc.
Chart 5: Evolving consumption patterns
Source: South China Morning Post, Fitch ratings, China Passenger Car Association and HDFC Bank
China passenger Electric vehicle wholesale deliveries
Services: While China’s services segment is emerging as the key driver of growth, expanding more than the
industrial sector, it is also witnessing shifts among its various sub-sectors. Tourism, entertainment, health care,
education and IT are some of the sub-sectors which are already adapting to the demands of an aging population,
the growing market for high-tech skillsets and a wealthier, savvier consumer base. For instance, China's domestic
tourism industry made an overall contribution of 9.94 trillion yuan to the country's GDP in 2018, accounting for
roughly 11% of total GDP. Amidst this shift, merely looking at the headline traditional indicators like services
PMI or rail freight may not entirely depict the sector’s changing dynamics.
Chart 6: Education & tourism – emerging drivers of services growth?
Source: HSBC, Statista, L.E.K. Global Education Practice and HDFC Bank
Manufacturing – moving up from quantity to quality
While reading China’s manufacturing sector of today, it is important to recognize the fact that it is no longer a
low-labour-cost country of many years ago. Instead its strengths now lie in its advanced production know-how
and strong supply-chain networks. As the economy moves up the value chain, metrics such as productivity
growth, expenditure on research and development and value addition by hi-tech categories seem to be more
relevant than just industrial production or an aggregated manufacturing PMI reading.
Chart 7: Chinese manufacturing –a leap from quantity to quality
Source: “The challenge of China’s rise as a science and technology powerhouse” by Reinhilde Veugelers, “Calculation of Total Factor Productivity and
Potential Growth Rate” by Bozhi Macro Forum and HDFC Bank
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Province level data – the many Chinas1
For Province abbreviations, refer to the appendix
During 2005-2015, China’s inland provinces (Centre, West and NE) outpaced their eastern peers in output and
productivity, in a shift from the prior decades of dominance by the China’s east coast. This was mainly on
account of boom in cheaper labour led manufacturing and upturn in global commodities cycle. But now with the
changing structure of the economy and growing prominence of services – especially hi-tech – the drivers of
economy are likely to shift back to China’s coastal provinces.
Chart 8: Locus of growth likely to shift back to the East?
Source: NBS, Moody’s Analytics and HDFC Bank
This is in context of the economic structure of these regions – while high-tech manufacturing and tech-related
services predominate in the East, more labour-intensive manufacturing industries and agriculture, energy and
resource extraction dominate the Centre and the West.
Chart 9: Tech clusters dominate the East while others remain heavy industries and commodities dependent
Source: NBS, Moody’s Analytics and HDFC Bank
1 Source: “China’s Provincial Economies: Growing Together or Pulling Apart?” by Moody’s Analytics
While the Centre and the West continue to register higher growth rate than their eastern counterparts, the
undergoing transition in the economy (from heavy & resource based manufacturing to hi-tech manufacturing
and services) has already started showing up in narrowing up of growth gap over the past three years 2015-2018
(refer to chart 8) and gradual productivity gains for the eastern side of the country.
Chart 10: The rise of high-value service industries lead to productivity gains for the East
Source: NBS, Moody’s Analytics and HDFC Bank
That said, government policies such as the Belt and Road Initiative and Made in China 2025 (which aim to elevate
growth inland) and drive towards urbanization are likely to benefit some of the China’s inland provinces in the
form of greater infrastructure investment and a greater supply of graduate talent despite low educational
attainment in some of the provinces in these regions.
According to the China’s National Development and Reform Commission’s 2019 urbanization plan, cities with a
population under three million should lift all restrictions on new domestic migrants, while cities with populations
between three to five million should “comprehensively relax permanent residency requirements”. For instance, in
February 2019, the city of Xian (capital of Shaanxi Province in central China) announced that any Chinese
citizen with a university degree can become a permanent resident of the city, with the rule also applying to
students who have not yet graduated.
Chart 11: While the East leads in education, China’s urbanization drive could help other regions attract educated pool
of migrants
Source: NBS, Moody’s Analytics and HDFC Bank
Underlying the larger trend (mentioned above) among Chinese regions are smaller yet important shifts
emerging among the provinces within each region. Despite the changing sectoral composition of the east
towards services, manufacturing and exports still accounts for a high share of economic activity in this region.
How quickly each province is adapting to the shift (that is to shed traditional segments of their economies) is
largely determining its growth performance. For instance, while most cities in two of the main manufacturing
clusters of the eastern region - PRD (Pearl River Delta around the province of Guangdong) and YRD (Yangtze
River Delta revolving around Shanghai, Jiangsu and Zhejiang) missed their growth targets in 2018, YRD has
been more successful in reaching its growth targets simply because the province of Guangdong (in PRD) still has
a lot of ‘old’ businesses and exporters and has been relatively slow to attract the tech and service companies,
which are more centred around Jiangsu and Zhejiang in YRD.
Source: Regional government statistics and HDFC Bank
Appendix
Treasury Economic Research team
Abheek Barua Tushar Arora
Chief Economist Senior Economist
Phone number: +91(0) 124-4664305 Phone number: +91 (0) 124-4664338
Email ID: [email protected] Email ID: [email protected]
Tanvi Garg Sakshi Gupta
Economist Economist
Phone number: +91 (0) 124-4664372 Phone number: +91 (0) 124-4664372
Email ID: [email protected] Email ID: [email protected]
Disclaimer: This document has been prepared for your information only and does not constitute any offer/commitment to
transact. Such an offer would be subject to contractual confirmations, satisfactory documentation and prevailing market
conditions. Reasonable care has been taken to prepare this document. HDFC Bank and its employees do not accept any
responsibility for action taken on the basis of this document
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