Economy /
Domestic Factors Drag on China’s GDP Growth
While it is tempting to believe that China’s 2019 GDP growth rate of 6.1 per cent – the lowest in three decades – is due to its ongoing trade feud with the United States, it may not be the only reason for the fading Chinese economic miracle.
The US-China feud on the Beijing’s economic output only tell half of the story. Tariffs imposed by the United States have no doubt increased pressure on Beijing’s exports which account for roughly 50pc of the country’s GDP, the more pronounced causes for the slowdown, however, are domestic.
China’s current problems stem from policy decisions that were taken decades ago. It benefited immensely from its expanding workforce. But that reversed in 2012, as the working-age population began to decline; a result of one-child policy implemented back in the late 1970s.
Another domestic factor at play here is the rising domestic wages. This loss of cheap labour advantage has made China a less attractive investment destination for foreign firms. But as demographics force China to cede space, India – the rising behemoth of Asia is well placed to take its place.
For the first time in two decades, India surpassed China as the leading recipient of foreign direct investment. With cheap labour and massive potential to grow, India has most to gain from China’s disadvantages.
India stands to gain even more from the US-China trade war, as the US sees New Delhi as a natural ally. Initial estimates suggest that India is likely to overtake China as the global population leader by 2027 making it the most attractive bet for the future.
Moreover, with its border clashes with China well known, the United States is likely to favour India in a bid to cancel out China’s hegemony in Asia.
Another domestic factor at play in China is the declining investment in fixes assets ie factories, machinery and real estate. The investment as a share of GDP fell from 82pc in 2016 to 71pc in 2018. The lagged impact of this decline led to a decline in consumption during 2019.
However, Beijing ended the year on a high note. Annual figures for 2019 show signs of rebound and resiliency with slight easing of pressures from the successful Phase 1 deal in US-China trade.
Industrial output which was seen shrinking in the second and third quarter of 2019, picked up by year-end. In another positive sign, data for consumption showed retail sales also stabilized — a barometer for consumer demand.
Moreover, Jan-December fixed investment rose 5.4pc year-on-year while infrastructure investment declined to 3.8pc.
Although the growth rate of 6.1pc was in line with the government target, the Chinese falling growth is unlikely to have bottomed out. Analysts fear that the key risk for China, going into 2020 will be the domestic consumption.
Going forward, the Chinese government will focus on rolling out further stimulus to help maintain the existing momentum.
