Is there an impending slowdown of the economy in China, and if so, does it pose a threat to its competiveness going forward?

The question over the sustainability of China’s economy growing north of 7.0% is often questioned by many economists, and market strategists as the economy has entered into a new phase of growth, where the availability of cheap migrant labour continues to be main pillar supporting the low cost structures of many domestic and international organisations seeking to tap into its vast pool of cheap labour, thus creating an export driven economy, fuelled by corporations seeking to minimise costs and maximise profits. However, as seen from the last few years following the outbreak of the Global Financial Crisis (GFC) of 2008 – 2009, several neighbouring Asian countries, including the Indo-China region of Vietnam, Cambodia, and the sub-Indian continent countries of Bangladesh and Sri Lanka have experienced a huge influx of foreign multinationals seeking to tap into their respective countries’ low cost structures, especially in the area of wage competitiveness, a vast pool of available rural workforce, cheap financing, and as well as investment incentives that seek to entice these foreign MNCs to set up their production facilities in these countries.

In the recent May 23, 2013 Production Managers Index (PMI) flash estimate report published jointly by HSBC Holdings Plc, and Markit Economics on the level of production activity in China for the month of May showed a reading of 49.6 as compared to the benchmark of 50.0 (A rating of 50.0 indicates a neutral level of overall production activity). This is compared to the month of April 2013 of 50.4, and on par with official median estimate of 50.4 from a Bloomberg News survey. The lacklustre PMI report caused global stock markets to plunge on that day, signalling the serious concerns surrounding the overall sustainability of China’s economic growth, and its ability to lift the entire global economy out of the slowdown seen in many countries, including the European Union (EU), and the slow recovery of the US economy.

With an expected slowdown in China’s economic growth, it is interesting to note that Chinese cities such as Shanghai, and Beijing has registered a Gross Domestic Product (GDP) growth of 7.5 percent, and 7.7 percent respectively, for the whole of 2012, roughly in line with the official GDP growth of China of 7.8 percent in 2012. For 2013 projections, several private sector economists including Goldman Sachs, and JP Morgan have called for a much subdued GDP growth rate averaging approximately 7.5 percent to 7.8 percent. In an online news article published by the China-based Caijing Magazine on May 22, 2013, there has been a general slowdown of China’s economy as seen by many cities and provinces, especially those situated in the coastal regions of China, such as Guangdong and Jiangsu. According the Caijing Magazine article, although Guandong Province has topped the nation in terms of GDP volume for 24 consecutive years, but in recent years, it has becoming increasingly difficult for the province to hold on to the top spot, especially with competition from other regions in the coast.

With the inter and intra-competition existing among Chinese provinces, foreign investors are seeking to tap the vast availability of resources located in the inner regions of China in search for cost competitive cities. As indicated in my recent article on the level of intervention brought on by the new Chinese leadership under President Xi Jiping, and Premier Li Keqiang, there is a concerted move to focus on development of market style policies, rather than outright fiscal stimulus. However, I believe that the Chinese people and businesses are still unprepared to face such minimalist intervention policies that help to sustain their livelihoods, especially the State-Owned Enterprises (SOEs) who continues to be reliant on generous government incentives in order to sustain their businesses.

China is entering into a new phase of development that few could not imagine decades ago, following the transition towards a market-based economy with the late President Deng Xiaoping steering the economy during the 1980s. However, in this era, China’s world standing is vastly different from the days of President Deng. This can be seen by the level of affluence, the social and demographic changes taking place as a result of the continuing one-child only policy, the influx of graduates who are increasingly restless, and will like the authorities to address their needs in a changing society, the growing threat of food insecurity, environment damage caused, etc. The Chinese leadership is dealing with a slowing economy and the changing demands of its people, and this could be one of the major challenges posed to its overall growth and change in the next few years. The Chinese people and outside observers will be closely monitoring China’s growth in the next decade and its willingness to be an active participant in the global stage.

About Hock Meng Tay - Chief Editor, Asia-Pacific Region

Hock Meng Tay, CAIA has written 181 post in this blog.

Chief Editor, Asia-Pacific Region Hock Meng Tay is a CAIA holder and is currently taking CFA qualification. He has over 10 years of experience working as research associate in several investment companies.He is an expert in financial analysis and has published research reports in his current role. He obtained his Masters of Business Administration in Integrated Management and Masters of Arts in Economics while serving his internship in Starsource Inc