The Chinese economy was slowing long before Donald Trump decided to change the terms of trade between the world's two largest economies. China's last quarter of 7% expansion ended in June 2015. This year GDP has fallen from 6.8% in the first quarter to 6.5% in the third. Economic growth on the mainland has been slipping for most of the past eight years with only the occasional quarterly improvement.
The reason for that evolution is the Chinese economy is maturing. No economy, even one as dynamic as China’s has been over the past generation can maintain the frenetic 10.2% pace of the decade before 2008.The bigger the economy becomes the scarcer are the domestic opportunities for large-scale growth. Targeting foreign markets becomes more difficult as products move up the chain of sophistication and and expense.
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Chinese economic activity and statistics have declined this year in whatever sector or type of metric is searched. Hard industrial and consumer statistics, sentiment numbers, trade, and retail sales have all edged lower. Government support for the economy has soared.
As noted above annual GDP dropped 0.3% to 6.5% in the third quarter from the first quarter’s 6.8% where it had been since the beginning of the second half in 2017.
The November growth in industrial output of 5.4% matched the lowest monthly growth since the financial crisis. The three-month moving average declined from 6.7% in April to 5.7% in November. This makes September, October, and November the weakest three months in China’s post-Deng history.
The deteriorating production picture is seconded by the official purchasing managers’ indexes from the National Bureau of Statistics. The manufacturing index was 50 in November resting on the division between expansion and contraction. It was the weakest reading since July 2016. This gauge has been falling after posting 51.9 in April. The non-manufacturing index was 53.4 in November down from 55.3 in January.
The private Caixin survey shows a similar decline. Manufacturing PMI dropped from 51.5 in January to 50.2 in November. PMI in services was down to 53.8 in November from 54.7 at the beginning of the year having dipped as low as 50.8 the month before.
Annual growth in retail sales skidded to 8.1% in November the smallest in over 15 years. China’s automotive market, the world’s largest is set for its first annual sales decline since the 1990s.
The industrial slide is in contrast to the dramatic surge in new yuan loans as the government attempts to stimulate the economy. The 12 monthly moving average of new credit this year of 1.306 trillion yuan is the highest on record. In the aftermath of the 2008 crisis, this average peaked at 845.917 billion yuan. New yuan loans have been above that level since July 2017.
The amount of money that the authorities are pumping into the economy in an effort to maintain growth is a sure indication of the underlying problems in the Chinese economy. The limited impact this deluge of cash has had on the economy is a sign that Beijing economic policy that has always favored industry and exports over domestic consumption has reached the limit of efficacy. What China needs are millions of people with the money and the disposition to spend on the products of Chinese factories. Unfortunately for the planners, factories are easier to build than a generation of free-spending consumers.
Foreign direct investment, another measure of industrial interest declined 1.3% in November, the first drop since last August.
Consumer inflation weakened to 2.2% annually in November, down from October’s 2.5%. From February 2017 at 0.8% CPI rose sharply to 2.9% a year later as the government’s directed loans washed through the financial system. The lack of sustained price increases is another measure of the inefficiency of the government’s attempt to maintain growth by expanding production.
China’s attempt to defend its economy from the impact of the trade dispute with the United States, while energetic and classically Keynesian does not seem to be having the desired effect. The Chinese consumer does not have the financial heft or consumption habits of his American cousins.
Chinese exports and imports have held up reasonably well. Annual exports were up 14.4% in September and 15.5% in October through they fell sharply in November to 5.4%. Imports, which includes many parts and items used in production for future exports also saw a precipitous drop to 3% in November from 20.8% in October. The three-month moving average for imports is at its lowest in 22 months.
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