China Records Lowest Growth in a Quarter A Century: Is This the Beginning of a Slowdown?

At best conjectures and deductions with no affirmations can be expected from the world’s second largest economy China. An economy with the staggering size of $10 trillion, China recorded a growth of 6.9%, its slowest in 25 years.

Of course one can argue that this is commendable for an economy of this size. However, there are concerns that these figures may not be entirely accurate, with real growth pegged between 5 to 6%. China carved its superior growth story with major infrastructural investments. It also became the world’s manufacturing hub. Increasingly, it has turned its attention to services.

The reasons for this are two-fold. China’s local market has a high need for financial and healthcare services. China is growing aggressively in the service sector with an average growth rate of 11. 6% vs. manufacturing’s 1.2%. (Source: The Economist)

The decline in manufacturing is due to a shift by China to goods of higher value addition. It has introduced robotics in repetitive, assembly line like jobs. The Made In China initiative hopes that with increased infusion of technology they have products designed and developed in China. It has also lost out its lower end manufacturing jobs to Vietnam. Germany with its increased use of robotics has been luring manufacturers. America too has been reclaiming the jobs it had previously outsourced to China in its efforts to pull its economy out of recession.

In the current scenario economists expect China to devalue the Yuan further and increase capital expenditure in an attempt to boost growth. The Guardian reports:

Despite six interest rate cuts since November 2014, and reductions in the amount of cash that banks must hold as reserves, high debt levels in the Chinese economy mean the measures have had limited impact. They also believe that it might not be enough.

Debt stands at 250% of GDP compared to 150% before 2008 (Source: The Economist). The pressure on the economy has already started showing with many businesses shutting shop, capital outflows have increased and bad loans have also increased. Compounding matters is the poor global demand. Realty has been hit in China, further decreasing the demand for steel and cement.

China is hoping to transition from a manufacturing heavyweight to an all-rounder by including more service oriented revenue streams. It is however having a tough time doing so and it remains to be seen if the Dragon continues to roar or become sluggish like a panda.

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