Do we have irrational expectations for the Chinese economy? On the one hand, we asked China to restructure and rebalance its economy, and it has delivered. It shrunk its state sector, and privately owned firms now account for more than 80% of employment and almost all new job creation. Almost all prices are set by the market. Investment growth is slowing and consumption is now the engine of economic expansion. China’s service sector is now larger than its manufacturing and construction sectors.
But at the same time, we are freaking out because a natural consequence of this restructuring is gradually slowing economic growth. How, we ask, can China survive with only 7% GDP growth? Let’s take a look at just how terrible China’s first quarter macroeconomic performance really was.
The World’s Best Consumption Story
A very weak industrial sector was balanced by strong consumption and service sector activity, fueled by healthy income growth.
Inflation-adjusted (real) income rose by 8.1% year-on-year (YoY) during the first quarter, down slightly from 8.6% during the first quarter of 2014. Income for migrant workers, who move from the countryside to staff the nation’s factories and construction sites, rose 11.9%, up from 10.1% a year ago, reflecting a tight labor market.
Strong wage growth and positive consumer sentiment led real retail sales to rise 10.8% in the first three months of the year, compared to growth rates of 10.9% last year as well as in 2013. In March, sales for cosmetics rose 10% and furniture sales were up 20%. In the first quarter, movie box office receipts hit a record US$1.5 billion, up almost 40% YoY. Online retail sales rose 41%.
Industrial value-added output rose by only 6.4% in 1Q15, down from 8.7% a year earlier. But this was balanced by stronger growth in the value-added production of the *tertiary sector—including services, wholesale and retail trade, as well as the financial sector and real estate, which rose 7.9%, marginally faster than a year ago. The tertiary part of the economy continues to be larger and contribute more to economic growth than the secondary part, which includes manufacturing and construction. Rebalancing at work.
Some parts of the economy have suffered more from these big structural shifts. Value-added output of the mining industry, for example, rose by only 1.4% last month, while the value-added of manufacturing of computer and telecom equipment rose 12.3%. As a result, industrial value-added fell 3.2% in the northeastern region, home to a large share of construction-related factories and resources extraction, while the rest of the country saw increases of 6% or more.
Property Showing Signs of Stabilizing
Even though the government only removed some barriers to new home purchases (reducing the minimum cash down payment to 40%, from 70%, for upgraders) at the end of last month, the residential market showed signs of stabilizing. New home sales fell only 0.9% YoY by volume, after declining 17.8% during the first two months of the year. It is also positive that developers have been responding to weaker sales and mounting inventory by cutting housing starts 20% YoY. As we’ve explained in past issues of Sinology, China’s housing market is past its peak and is very soft, but we believe a collapse is highly unlikely.
Trade Softer, but Also Far From Collapse
You’ve probably read dire headlines about weak China trade numbers for March, but the story is more nuanced.
China’s exports fell 15% YoY in U.S. dollar terms last month, compared to an increase of 48.3% in February. But the huge difference is explained largely by the lunar New Year effect and monthly volatility. There is no evidence of collapse in China’s main export markets, nor is there reason to believe that China’s exports suddenly became far less competitive.
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