Worries about an economic hard-landing in China forcing Beijing to sharply devalue the renminbi have sent shockwaves through the global financial markets. Some investors even wonder if Beijing is losing control of its economy and currency. In my view, such a bearish view seems to have missed half of the picture.
Granted, traditional macroeconomic growth indicators, such as industrial output, electricity consumption, freight volume and steel and cement output, have painted a hard-landing scenario for the Chinese economy by showing either anaemic growth rates or outright contraction (Charts 1 and 2). However, these indicators only represent China’s industrial- and manufacturing- based economy.
The new economy, which is represented by the service-based tertiary sector, has grown larger than the old economy, which is represented by the secondary sector, since 2013 (Chart3). This suggests creative destruction in progress, where the new growth indicators, such as movie box revenues, internet usage, online sales and insurance premium, have shown robust growth (Charts 4, 5, 6 and 7).
The traditional macroeconomic indicators fail to capture such structural changes. The fact that China is going through a difficult transition from the old to the new economy with some setbacks in financial reforms does not necessarily spell an economic crisis.
The dichotomy in China’s economy is apparent in the electricity consumption and railway transport data. While electricity consumption by the old economy has been contracting, usage by the new economy has been growing steadily (Chart 8). Notably, passenger traffic (which is related to the new economy of personal travel and domestic tourism) has been growing briskly while freight traffic (the transportation of industrial goods and materials etc.) has been falling (Chart 9).
Growth of the tertiary sector has underpinned urban employment growth so far, which is crucial for generating personal income and, hence, consumption growth. Meanwhile, China’s industrialisation is also migrating westward (Chart 10), generating growth momentum by tapping unused and cheaper resources. The trouble at this stage is that growth of the new economy is not strong or large enough to offset the contraction of the old economy. This argues for a policy-easing bias until economic momentum stabilises.Download to read more