3 Reasons Why Slowing Growth Is Good News for China

Every market participant worth his salt rarely misses economic releases from China. It is, after all, the second largest economy in the world and has been touted as the engine for global economic growth.

In the past, news of slowing growth from the Asian economy almost always gave investors a panic attack. It didn’t seem to be the case in the country’s most recent GDP release though.

Data for Q3 2012 revealed that the economy grew at its slowest pace since the first quarter of 2009 and marked the seventh consecutive quarter of deceleration. However, contrary to the past market reaction that we’ve witnessed, investors barely flinched at the release of the figures.

Were investors snoozing when the report was released? I doubt it! In this humble, not-so-old man’s opinion, there’s more to the GDP report that meets the eye. Here are three reasons why slowing economic growth could actually be good news for China:

1. It highlights the labor market’s resilience.

China’s annual GDP has never dipped below 8% in the past ten years. And so, a lot of people thought that the country’s robust growth is the most crucial factor in propping up jobs. Heck, even Premier Wen Jiabao said that a growth rate of 8% was necessary in having stable labor conditions and that anything lower than it would create “problems.”

But it seems that the tides have changed.

Despite quarter after quarter of slower growth, the labor market has proved to be resilient. In fact, it has been reported that the country created 9.18 million jobs from January to September and topped expectations. Analysts estimated that only 9 million jobs would be created for the first 9 months of 2012.

It would seem that the effect of the government’s one-child policy that started in 1979 is now working its magic on the economy. There are now fewer people joining the workforce at 4 to 5 million, versus the rate seen in the early 2000′s at around 10 million.

Doing the math, economic experts think that a growth rate of around 6% to 7% would be enough for the country to accommodate the number of people looking for jobs.

2. It signals that the worst could be over.

Despite the headline figure, a closer look at the report actually reveals a few bright spots in the economy and that the worst could be over for China.

Data for September were particularly impressive. For instance, industrial production rebounded from a three-year low during the month when it posted an uptick of 9.2% after coming in at 8.9% in August. Compared to a year ago, retail sales for the month were also up 13.2% which is the highest reading we’ve seen since March.

September also marked the fastest pace of export growth in three months, clocking an annual increase of 9.9%.

3. It shows the government’s commitment in restructuring the economy.

It may come off as a surprise to some, but a gradually slowing economy is actually what the government has been gunning for.

Remember that China has been trying to shift away from its current economic growth model to one that is more focused on consumption and services. Despite the pressure brought about by lower GDP figures, the PBOC has refused to cut interest rates since July which could’ve helped boost economic growth but also might have worsened the real estate bubble.

Instead, the government has been working on meeting its GDP target for the year at 7.5% by approving more investment projects and giving out tax support for exporters.

With all that said, I wouldn’t get too caught up in China’s lower GDP figure if I were you! But of course, that’s just me. Do you think we need to worry even more about the Asian economy?

  • InvestmentCapitalSystems

    doesn’t china’s achievement affect asian country’s GDP?