What's going on?
China reported that its economy grew 6.7% last quarter – slightly more than economists expected (and in line with the government’s target). The caveat: growth was very much supported by government initiatives.
What does this mean?
China’s economy is undergoing a transition from one that is heavily reliant on manufacturing and “investment” (things like building big apartment towers) to one where “services” and personal consumption (like going to restaurants and shopping) play a bigger role. This transition has been bumpy and has caused economic growth to slow down.
Earlier this year, the Chinese government took action to provide a boost to the economy by doing things like encouraging state-owned banks to lend more money to companies. That mainly boosted the manufacturing and investment economy – which is probably why growth figures slightly exceeded expectations.
Why should I care?
For the markets: China’s economic priorities have a huge impact on many large companies.
One of the biggest impacts from China is on the price of industrial commodities (like copper). For example, earlier this year prices jumped significantly as a result of the Chinese government’s stimulus (and that benefitted mining firms hugely). There are also a host of western companies, from Apple to Yum Brands, which are hoping to benefit from an anticipated big increase in Chinese consumer spending.
The bigger picture: China’s huge debt is a consequence of its stimulus attempts.
Six weeks ago, we reported that famed investor George Soros was betting on China’s economy crashing as a result of its huge debt burden. The debt within China has been accumulated partly because of government-led stimulus: companies are often encouraged to borrow and spend more and more money – and it’s not clear they’ll be able to afford to pay it all back. Soros may or may not turn out to be correct – but ongoing stimulus has almost certainly made China’s economy more vulnerable.