News Analysis

China's shift to slower, higher-quality growth will be hard and painful

As China's growth rate last year sunk to its lowest in a quarter century, officials highlighted bright spots amid the slowdown, pointing out gains in consumption and signs that the country's shift from industry to services is gaining ground.

But while progress in these areas cannot be discounted, a closer look at the latest snapshot of the world's second-largest economy suggests that its shift to a "new normal" of slower but higher-quality growth will be a painful and difficult task.

Recent data show China's growth slowing to 6.9 per cent last year, its softest since 1990, weighed down by industrial overcapacity, a property slump and a huge debt pile-up.

Services, however, reached a milestone, making up more than half of China's US$10 trillion (S$14 trillion) economy for the first time.

It accounted for 50.5 per cent of gross domestic product (GDP) last year, up from 48.1 per cent in 2014, and significantly higher than manufacturing's 40.5 per cent.


Consumption made up about two-thirds of China's economic growth last year, the biggest contribution since 2001. This is up 15 percentage points from 2014. But the breakdown between household and government spending has yet to be released. In 2014, for instance, of the 51.4 per cent of the economy made up by consumption, only 37.9 per cent of GDP was household spending.  - PHOTO: REUTERS

But while Beijing's gradual move away from an export- and investment-led growth model is cause for some cheer, experts say it is not so much the rapid growth in services but the deep downturn in vast areas of industry that are influencing the numbers.

Output of everything from steel to cement to electricity fell last year. Growth in the industrial sector also slowed sharply to 6 per cent last year from 7.3 per cent in 2014, while services expanded by 8.3 per cent last year from 7.8 per cent in 2014.

"It's the slowing industrial sector that is making services look better. While the sector is growing quite quickly, I would not consider this 'very strong growth'. It is also likely to experience a slowdown this year," said Mr Chen Long, an economist with Beijing-based research firm Gavekal Dragonomics. He added that while newer sectors like e-commerce are still doing well, the "dramatic growth" it enjoyed at the beginning when its base was still small has ended - and hence, insufficient to single-handedly drive rapid growth.

Experts also point out that the services industry was powered by income growth in financial services last year, a boost that might not be sustained this year. Already, volatility in China's stock market has shrunk trading activity with a rise in regulatory scrutiny also likely to negatively impact the sector.

But China's attempt to fire up domestic consumption as an engine of growth is also another closely watched measure in Beijing's efforts to rebalance its economy.

On paper, China has turned in a stellar performance.

Consumption made up about two-thirds of economic growth last year, the biggest contribution since 2001. This is up 15 percentage points from 2014.

But the breakdown between household and government spending has yet to be released. In 2014, for instance, of the 51.4 per cent of the economy made up by consumption, only 37.9 per cent of GDP was household spending.

Financial Times columnist Martin Wolf pointed out in a recent article that household disposable incomes were just 61 per cent of China's GDP in 2013, with the Chinese saving about a third of this.

"This explains why (household) consumption is only some 40 per cent of GDP. The shift in incomes towards households, needed to raise the consumption share in GDP decisively, is happening at a glacial pace," he added.

In comparison, consumer spending was about 69 per cent of GDP in the United States last year while the figure is 38 per cent in Singapore.

Others also warn that consumption growth, while resilient, is on a shaky footing. UBS economist Wang Tao said: "Considering that growth of disposable income is slowing and that the closing of excess capacities will likely affect employment and wages, we think consumption growth will face some headwinds in the coming year."

Still, while its challenges are numerous, the Chinese economy, often seen as coasting on "two-speeds", is not collapsing, although growth will continue to slow.

"It is simply unrealistic to expect the same high growth rates as in the past, when the size of the economy has grown to more than US$5.3 trillion using 2005 prices, compared with around US$2 trillion in 2004," said UOB economist Suan Teck Kin. "We expect growth to maintain at about 6.8 per cent in 2016... and to decelerate continuously and to hit 6.4 per cent by 2020."

A version of this article appeared in the print edition of The Straits Times on January 21, 2016, with the headline 'China's shift to slower, higher-quality growth will be hard and painful'. Print Edition | Subscribe