The Wall Street Journal and Financial Times share a pessimistic view of China’s third quarter macroeconomic results, with headlines declaring that 6.9% GDP growth was the slowest since 2009. From our perspective, however, the most important points are that retail sales growth accelerated slightly, signaling that consumers shrugged off the A-share market fall, and that for the first time ever, services and consumption accounted for over half of China’s GDP — an important milestone in the rebalancing process. Oh, and that 6.9% growth, on a base that is about 300% bigger than it was a decade ago (when GDP growth was 10%) means that the incremental expansion in China’s economy this year is about 60% bigger than it was back in the day.
Let’s Start by Dispensing With the Least Important Statistic
The 6.9% GDP growth number was the least important number published Monday, October 19 in Beijing. We don’t base investment decisions on GDP growth in any market.
The figure is just a tad below the 7% pace of GDP growth for the first two quarters of this year, and is 0.3 percentage points slower than the 3Q14 pace of 7.2%—which was 0.6 percentage points slower than the 7.9% rate in 3Q13. This is the inevitable deceleration of China’s growth due to changes in demographics, slower growth in construction activity and the base effect. The financial media will likely be able to write headlines about the slowest GDP growth rates since the Tang Dynasty for many quarters to come. But is that really the most important part of the story?
There Are Two Far More Important Parts of the China Story
We are pleased to see that the rebalancing of China’s economy toward consumption and away from exports and investments continues to make significant progress. This rebalancing is key to our investment strategy.
For the first time ever, services and consumption (the tertiary* part of the economy) accounted for more than half of China’s GDP, at 51.4%, up from 41.4% a decade ago. This mitigates weakness in manufacturing and construction (the secondary* part), and, if this rebalancing continues, it should mean that macro deceleration will be gradual.
Net exports (the value of exports minus that of imports) contributed a small (-1.8%) negative drag on GDP growth.
The World’s Best Consumption Story
The rebalancing is driven by China’s consumers, with consumption accounting for 58% of GDP growth during the first three quarters of this year.
Shrugging off the mid-June fall in the stock market, real (inflation-adjusted) retail sales actually accelerated to 10.8% last month, up from 10.4% in August, and the fastest pace since March.