After a 6.6% growth rate for 2018 (an almost three-decade low), China aims for an economic growth rate in the 6% to 6.5% zone and while this may seem less than impressive compared to the numbers of the past, it’s important to understand that the authorities are interested in transitioning to a more sustainable pace of growth rather than aiming for GDP growth at any cost. After years of debt-based growth which has frequently been accompanied by gross misallocation of capital, it’s actually quite refreshing to see a change of perspective.
Simply put, their 6% to 6.5% goal represents their attempt at finding the right balance between the intention of doubling China’s real GDP by 2020 and their previously-mentioned intention of avoiding an unstable overheating of China’s economy.
However, there is without a doubt a clear downward pressure on growth in 2019, a pressure to which the authorities are responding with measures such as tax breaks for small companies (the main employment absorption channel at this point). To be more specific, companies with less than 300 employees, assets below $7.6 million and a taxable yearly income of less than $456,000. Over 95% of all Chinese enterprises qualify, with 98% of those being private firms.
According to current estimates, the burden on small businesses will be reduced by roughly $30 billion per year, resulting in an employment as well as consumption increase. Speaking of employment, over 11 million urban jobs are expected to be created this year, bringing the urban unemployment rate to 5.5% and a registered urban jobless rate of 4.5% according to GOV.CN.
An important area of attention is, of course, China’s domestic consumption due to the inevitably changing nature of its economic growth model. For a bit of added context, roughly 78$ of the GDP growth for 2018’s first nine months is estimated to have been generated by internal consumption, in light of the 8% increase in disposable income.
Do keep in mind, however, that targets are just… well, targets.
In 2018, for example, the 11 million target for new urban jobs was put to shame by the actual 13.5 number and it should be interesting what will happen this year, with the 11 million target being once again chosen.
As can be seen, 2019 is expected to be a year of consolidation and stability, with overly-optimistic goals being replaced by a more pragmatic approach, centered around the stimulation of private initiative and robust internal consumption.
Those who expect China’s economy to grow at 10%+ yearly forever need to understand that there is a certain dynamic to economic growth that cannot be avoided, no matter how optimistic you choose to be. There is a significant difference between the less developed China of a few decades ago which needed double-digit growth to even hope to catch up with the West and today’s China, the #1 economy in the world judging by PPP GDP and the #2 economy from a nominal GDP perspective.
Is there still ample room to grow? As made clear through many articles here on ChinaFund.com, the answer is a resounding “yes” but prudence is the operative word and optimism should not come at the expense of stability and sustainability. At this point, it seems the authorities in China are aware of this reality.