China: economic growth lower for longer: because of middle income trap or passing of Lewis Point

The growth in China disappoints. The Chinese Citigroup Economic Surprise Index is lower than in Europe. The last data are bad.

More people are starting to believe that the growth is not all recovering to 7.5%+ but going down to about 6-7% to stay there for longer. Ex big help from the government it can stay there for years. Government will step in because they see also the low growth but much less than in 2009 and with much more caution and less soon.

The explanation for the disappointing growth is the slower investment growth, export growth while retail sales are now also disappointing.

That slowing of the investment growth is seen and forecast by the Chinese government in their five year plans.They rightly put more emphasis on consumption growth.

Chart of investment growth in China (no numbers for the months in which the Chinese New Year can fall)

The consensus thinks this decline of investment growth will be temporary and is to be seen as a payback of the bubble in 2009. When the soft landing is over, you will see numbers like the green line.

More and more it is becoming clear that the slowing will go further, to about 10-15% or even lower. Credit growth will not recover to the old growth and lower reserve requirement ratios and lower interest rates will not help much.

There are two reasons for this:

1. China is falling in the middle income trap, just like many moons ago happened with Japan and Korea (the good examples) and Latin America (some of the bad examples). Even in the good examples economic growth slowed considerably. Investment growth slows and consumption growth accelerates but the multiplier of investments is higher than that of consumption so growth slows and productivity growth also.

China is passing the Lewis Point, where the growth of the number of labourers in manufacturing will go to zero, while in previous decades that grew with 20-30 million of farmers became workers in manufacturing wit hits much higher prooductivity and added value. The wages go up considerably after the Lewis Point, but this doesn’t compensate enough for the stop of the growth of the labour population. Capex is going down because of the higher wages and the loss of emergency to create work for new labourers.

2. China invests way too much, as much as the US and Western Europe together. Investments/ GDP are much higher than was the case in Japan and Korea when they passed the Lewis Point. There is much overinvestment now in China as is to be seen in real estate and inventories of commodities. Investments/ GDP have to come down a lot.

The growth in China will not collapse, even with lower investment growth and lower exports to Europe, because consumption is doing well (forget the last numbers) and lower inflation will help. Wages are rising fast, inflation is declining, oil prices going down.

There are still many good infrastructure investments to do in China and this will help growth more than it did in Japan in the 90s.

So I think we will see about 6.5-7% growth in China this year, with infrastructure investments etc next year 7.5-8.5% and then on average 6-7%.