There will be two competing perspectives on China’s 2014 economic performance.
One camp will focus on 7.4% GDP growth being the slowest pace in 24 years. The alternative perspective will note that gradually slower growth was expected and is inevitable after two decades of 10% annual growth. The glass-half-full camp, which includes Sinology, also notes that after 7.7% growth in 2012 and 2013, last year’s 7.4% doesn’t feel like a huge slump. Moreover, because the base on which last year’s 7.4% calculation was made was more than 300% bigger than the base from a decade ago (when growth was 10.1%), the incremental increase in the size of China’s GDP last year was 100% bigger than the increase at the faster speed 10 years ago.
Consumption Remains Very Healthy
Consumer spending remained very healthy, with inflation-adjusted (real) retail sales up 11.5% year-over-year (YoY) in December, the fastest pace of the year, and up 10.9% for the full year. A particular bright spot was online sales, which rose 50% YoY last year and accounted for almost 11% of all retail sales.
In our view, China is still the world’s best consumption story, especially compared to U.S. retail sales growth of about 2%. But I believe its retail sales growth will continue to decelerate as income growth slows. Real urban income increased 6.8% last year, impressive but down from 7% in 2013 and 9.6% in 2012. Just under half of China’s population still lives in the countryside, and real income there rose 9.2%, down from 9.3% in 2013 and 10.7% in 2012. Wages for migrant workers, who move from China’s countryside to staff the nation’s urban factories and construction sites, rose by almost 10% last year. The country’s overall labor market remained stable.
I expect wage growth to continue to decelerate gradually, which would lead to steadily slower retail sales growth. The government’s anti-corruption campaign has also contributed to slower consumer spending, and that too should continue.
Investments Continued to Cool
One of the main reasons behind the continued economic deceleration is slower growth in fixed asset investment (FAI), which rose 15.7% last year, down from 19.6% in 2013 and 30.1% in 2009. This slower rate of investment growth reflects that so many roads, power plants, houses and factories have already been built. I expect FAI to continue rising at gradually slower rates each year for some time.
Softer Housing Market, but No Crash
A significantly weaker residential property market contributed to slower economic growth. New home sales fell 9.1% YoY last year, in sharp contrast to the 17.5% rise in sales by volume in 2013. (From an investor’s perspective, however, it is worth noting that Chinese buyers still purchased more than 10 million new homes last year.) As a result, investment in the housing sector rose by only 9%, down from 19% a year ago.