China's growth has peaked. After four decades, the country's economic model has run its course and the benefits it brought to the country in terms of near-universal employment, political legitimacy for the party and a strong social contract have begun to fade. In the coming years, the pace of China's economic growth — along with its exports and foreign investments — will slow substantially while the country turns its attention toward fixing its social, regional and financial imbalances.
China's economy kicked off 2019 with signs of decelerating growth. The official growth rate for the country's gross domestic product (GDP) slipped to 6.6 percent in 2018, down from 6.9 percent the year earlier. The figure represents China's lowest growth since 1990, when Western sanctions shrunk GDP growth to just 3.9 percent. In addition, fourth-quarter GDP growth reached its lowest level since the global financial crisis at 6.4 percent.
The news of low economic growth coincides with signs of weakness in other aspects of China's economy, highlighting its fragility as Beijing prepares to endure a number of challenges in the coming months. Last month, exports fell by 4.4 percent during the typically high-demand festive season, due in large part to the ongoing trade war with the United States. Meanwhile, the rate of investment growth fell to 5.9 percent in 2018 as a result of weaknesses in the manufacturing and real estate sectors. And while retail sales have remained largely stable, weak import figures and declining car sales in the final months of 2018 indicate growing challenges in consumption levels, which Beijing has been attempting to increase as the government works to rebalance the economy. Overall, China's economy has shown poor signs of growth in almost all areas other than industrial output, where government efforts to cut industrial capacity in upstream industries contributed to positive growth.
There are always reasons to be skeptical of China's official statistics, but GDP is still the best indication of where its economy is headed and how the country's leadership is working to shape expectations. As the world's second-largest economy takes hits from trade disputes and Beijing's continued attempts at rebalancing, all signs point to further deceleration. Despite the government's best efforts, that slowdown shows no signs of ending soon — especially as the country works to address its social, regional and financial imbalances. The government will reportedly set a growth target of 6-6.5 percent for 2019, and the majority of Chinese provinces that have already released their GDP targets for 2019 have set lower goals than they did in 2018.
Why It Matters
As China approaches a period of transition, it has shown a greater tolerance for economic slowdowns and the resulting social tensions. Beijing has, for example, ruthlessly worked over the past three years to curb speculation in the property market, cut excessive regional and infrastructure spending, and to limit the amount of new debt being offered to the country's state-owned companies and financial system. At least until the early months of 2018, these self-inflicted pains were partially cushioned by a relatively robust trade environment and export sector, as well as a significant uptick in service sector employment. However, escalating trade frictions with the United States and the resulting tariff war have accelerated the pace of China's economic slowdown.
Social stability and steady employment are at the center of Beijing's economic strategy. But while official employment levels remain steadfast, the situation is far from ideal for many struggling manufacturers and private businesses. Manufacturing workers in coastal provinces such as Guangdong reportedly returned from work early in the season, and the trade war alone could cost 5.5 million jobs in coastal regions. Separately, there are increasing signs that businesses in the tech, financing and real estate industries will slow the pace of new hires or even layoff staff. The government has previously used a combination of stimulus packages and tax reductions to stave off unemployment, but these efforts may start to lose their efficacy. Still, the White House has shown a growing willingness to cut a deal with China provided it makes good on certain concessions, which could give Beijing a welcome reprieve as it strives to manage its economy.