By Linda Yueh

This week’s flash PMI data suggest the recent weakness in the Chinese economy extends into the fourth quarter. HSBC PMI rose in October at the start of the quarter, but remains below 50 at 49.1. That’s an improvement from September’s 47.9 but is still a sign of contraction.

This is after GDP expanded 7.4 per cent in the third quarter, slower than the government’s 7.5 per cent target. And, consensus forecasts gathered by Bloomberg don’t show much stimulus or easing for the rest of the year.

The structural slowdown in China may finally be gaining recognition. In the second 30 years of the “reform and opening” that started around 1980, Beijing anticipates a new trend growth rate that will be considerably below the first 30 years. A growth rate of 7-7.5 per cent is likely to be China’s ‘new normal’ rate for the next few years.

When the economy last grew at such a slow pace during the 2008/9 global crisis, unemployment spiked and an estimated 20m workers lost their jobs. This time, employment has held up. Tsinghua University professor and former PBOC adviser David Li has pointed out that employment growth is in the region of 11m in the first 9 months of the year versus the normal target of 9m jobs for the entire year.

Along with getting closer to the technological frontier, which is associated with a growth slowdown as the “catch up” phase begins to end, another reason for China is demography. RBS’s Louis Kuijis, the former Beijing-based World Bank economist, estimates that the working-age population is growing at 0.5 per cent per annum, a third of the previous pace when an 8 per cent growth rate was thought to be necessary to maintain employment. He infers that the trend growth rate may now be around 7.5 per cent.

But, it’s hard to discern if a slowdown is structural or still predominately cyclical. Another difference with 2008/9 is that the current export slowdown was expected so firms could adjust and there is a more flexible renminbi to help the adjustment in the real economy. It appreciated by a record 4.4 per cent in 2011 alone against the dollar and a wider trading band has helped to better insulate against a balance of payments shock. Export falls require more real adjustment if the currency is less flexible as China’s was in 2008/9.

The HSBC PMI figure may still be revised and has shown a slightly worse picture than the official PMI, which is larger in sample size but unhelpfully includes Taiwan, Macau and Hong Kong.

But, if the downturn is msotly cyclical, then the government has tools to stimulate the economy. If it’s structural and slowing in line with the government’s plan, then the small measures currently seen will continue, and we will all need to become used to a slower but perhaps more stable growth path for China.

Linda Yueh is Bloomberg’s TV Economics Editor & author of Enterprising China: Business, Economic, and Legal Development Since 1979 (Oxford University Press, 2011)

Related reading:
Global Insight China comfortable with weaker growth, FT
Global economy When China sneezes, FT
In depth China leadership transition, FT
China slowdown could be nearing end, FT
China exports: a complicated picture
, beyondbrics
Bric inflation: China on its own
, beyondbrics

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