China's Economic Slowdown: Two sides of the same coin

There has been an intense debate over the policies that the Chinese government should have implemented in order to have successfully overcome this summer’s economic soft patch and avoid a much-dreaded economic downturn. Regarding the real economy, while some suggested that the priority was to prop up weakening growth in the all-important manufacturing sector, others stressed that the key was to boost domestic consumption. 

In my view, policymakers have to continue with their efforts to rebalance China’s economy, which is the only way to effectively tackle weaknesses in the manufacturing sector, boost domestic consumption and, in general, to promote a sustainable growth path for the future. Acknowledging that one-off measures are likely to relieve some of the short-term pain, any initiative has to be part of a more general plan as the key challenge is not to deal with the current slowdown, but rebuild the country’s economic fundamentals.

The best way to achieve a sustainable increase in private consumption is to drastically improve the country’s social security net in order to free up China’s massive savings and allow households to spend more on consumption. Moreover, Chinese authorities should push forward reforms to liberalize the financial sector and expand credit access to households.

In line with the draft for the 5 Year Plan unveiled in recent weeks, the government has to implement policies to upgrade the country’s industry in order to improve China’s value chain. The country has to move from low-end to hi-tech manufacturing. Moreover, better allocation of financial resources through market-oriented policies, along with a more prominent role of private companies, have the potential to promote more dynamic enterprises and reduce massive manufacturing overcapacity. In a context of a protracted global economic recovery, boosting private consumption and improving China’s manufacturing sector can precisely be a way to generate demand for Chinese goods.

According to the panel of 36 analysts that FocusEconomics surveyed this month, growth in China will decelerate in the quarters ahead although only at a gradual pace. This situation will reflect more benign global economic conditions, the stimulus measures that have been implemented by the Chinese authorities since June and, particularly, the government’s efforts to shift the main sources of growth from manufacturing, investment and exports toward services and domestic demand.

Author: Ricard Torné, Head of Economic Research

Date: November 16, 2015