Thursday 22 January 2015

China's 2014 GDP Miss

Important context for the Chinese slowdown provided by the Economist:
China joined an exclusive club last year: its economic output exceeded $10 trillion, making it only the second country to achieve that feat (America reached this level in 2000). At market exchange rates, China’s economic output was $10.3 trillion last year, more than five-times bigger than a mere decade ago, when it was $1.9 trillion.
It almost feels like commentators lose sight of the fact that we're talking about a slowdown in GROWTH  rather than an aggregate decline. The article goes on to mention that lower growth rates of a larger base still adds more additional demand than the staggering growth rates up to the most recent years (when the base was sufficiently large).

The article also points to the changing composition of the growth where consumption and services are playing a more prominent role (as constantly pushed by external and internal reform minded folks as a needed rebalance alike). I've long said that China has recognized this need and should be given the benefit of the doubt in achieving them at their own pace given their track record over the past couple of decades, so I'll focus on the second point made:
Second, healthy wage growth means that labour’s share of China’s economic output rose last year, another critical part of tilting the country towards greater consumption. After controlling for inflation, incomes increased 8% last year, three-fifths of a percentage point faster than the economy as a whole. Importantly, this income growth probably also resulted in a mild improvement in income equality within China because it was rural citizens, poorer than their urban counterparts, who did particularly well. Rural incomes increased 9.2% last year on average, while urban incomes rose 6.8%. The gap between urban and rural incomes peaked at a ratio of 3.3-to-1 in 2009; it fell to about 2.9 last year.
China is adding jobs, increasing income, all while undertaking structural reforms. We've seen the Shanghai and Shenzhen stock markets finally gain traction over the last year (up 55% and 42% respectively) as these markets have slowly been opened to foreign money.

The bottom line is growth does not equal growth does not equal growth. China isn't undertaking the Shock Therapy type of timeline that apparently most people want them to undertake, but why does this surprise anyone?

Again, it comes down to where the benefit of the doubt should lie. I still have to side with the Xi and the rest of the party leaders over media 'experts' on this front. Missing their growth target could have been bad, had they maintained the status quo. Missing their growth target while undertaking some pretty massive, if not too gradual, reforms. I'd chalk it up as a win.

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