Analysts agree that the China slowdown is real, but are we seeing the big picture?

The World Expected Worse but Chinese Data Didn't Comply

Q3 economic growth in China came in at 6.9%. The consensus estimate was 6.8%, so technically everyone should be happy with the performance of the Chinese economy. However, given the steep declines in economic performance of the world's second-largest economy in July, August and September one wonders whether the reported figures are accurate. In order to understand precisely what is going on in China, it is essential to take a step back and view the economy from multiple angles. The focus of macroeconomic policy now is on building up the retail sector, urbanizing hundreds of millions of Chinese, and catering to their needs with massive infrastructure spending. The shift away from export driven growth to a consumer centric culture is well underway, and we are seeing evidence of this in the ghost cities springing up all over China.

China's economy is valued at over $10 trillion, but much of it has heretofore been debt driven. With a focus on the consumer component of the Chinese economy, a more sustainable, lucrative and enduring economy can develop. The importance of the change of focus of the Chinese economy cannot be underestimated. Emerging market economies across Africa, Latin America and Asia which have traditionally supplied China's insatiable appetite for raw materials are having to rebalance their priorities. Commodity prices have hit multi-year lows and the currencies of EM countries are trading at their weakest levels. This is especially impactful on countries where the mining sector contributes substantially to the GDP of the country's economy.

Emerging Market Economies Hurting

South Africa, Zambia, the Democratic Republic of Congo, Venezuela, Russia, India and Brazil are major exporters to China. Declining demand from China naturally impacts on the receipts generated by these countries in terms of export-driven growth. Low commodity prices result in declining revenues and profitability, with layoffs across the board. But does this mean that China is hurting or that the world is hurting because China has moved in a different direction? Clearly, the global economy is in a state of flux and what we are seeing in terms of US dollar strength, monetary easing policies in the European Union, recessionary fears in Japan, interest rates at near-zero levels around the world et al is evidence of this. The fact of the matter is that multinational companies have a small part to play in China's retail sector, but they have a substantial role in supplying China with raw materials for use in manufacturing. Therefore their profits are declining and share prices are falling as a result. China has a gluttonous appetite for raw materials, including silver, copper, iron ore, coal, oil and so forth – but with declining commodity prices, these multinational companies supplying China are hurting. With a focus on the services sector, countries that are major trading partners of China such as Australia, Mongolia, Japan, Singapore and others will do well to offer more educational, tourism, training and other related services activities to China.

A Rebalancing Act for China and the World

This rebalancing is at the heart of the economic dynamic that we are seeing between China and the rest of the world. Another worrying factor for commodity suppliers is China's inefficiency. For now the Chinese have been rather gluttonous in their appetite of raw materials. But if they move towards a more profit-driven model, demand for raw materials from foreign suppliers will diminish greatly. And if foreign companies are thinking of entering the retail market, they are going to be met by tremendous bureaucratic red tape from the Chinese government. The economy is heavily managed by the state and this is true for all sectors including banking, telecom and others. Analysts keep pointing to the fact that this is the biggest slowdown since 2009, but sacrifices are always necessary when economies move from one model to another. Retail sales have increased and the government’s plan is working. Whether or not the 6.9% GDP growth figure is believable is secondary to the fact that a rebalancing act is underway. Expenditure has increased in China, and it will continue to increase as a growing middle class comes into its own.

Despite the slump in equities prices in China, this has not spilled over to the everyday consumer. Not surprisingly, retail spending now accounts for an incredible 60% of the GDP in China. The Chinese unemployment rate is also comparable with the US unemployment rate at 5.2%. Clearly, this switch is working and if speculative assessments remain neutral, the external and internal components of the Chinese economy will prosper. The outside world may not know precisely what targeted growth rates the Chinese government has in mind, and this is something that needs to be remembered. The authorities in Beijing may well be pleased with the figures that have been presented, despite this negative publicity. The latest figure puts the Chinese middle class at 109 million people out of a population of 1.39 billion people. This is a potentially huge driver of economic growth and it will only get bigger as time goes by.