🎉 We've launched our new mobile app! Learn about it here

A Rocky Road: Transforming China’s Economy

Image source:

What's going on?

China reported its economic growth data on Tuesday and (unfortunately for China) it was smack in line with investors’ expectations of 6.9% annual growth – the slowest growth rate for 25 years!

What does this mean?

China’s economy is changing: manufacturing and “investment” (a.k.a. building stuff like factories and apartment buildings) is being de-emphasized and “services” like healthcare, financial services and shopping is growing. It’s both the slowing growth and the economy’s changing composition that is hurting countries, companies and commodities exposed to the “old China.”

The economic growth data was expected and probably didn’t change many investors’ current views. But Chinese retail sales data for December was also released: it grew a little less than expected, at 11.1% versus December 2014, but that’s still a big growth rate. It’s a good indication of how the services part of China’s economy is growing quite substantially. The problem, for now, is that it’s failing to make up for the decline in manufacturing and investment growth.

Why should I care?

The bigger picture: China will probably act to stimulate its economy – the question is if it will be effective. It could lower interest rates again, devalue the yuan further and/or increase government spending – all of which would probably lend support to the economy. But the efficacy of these actions are debatable. Of longer term importance is probably the extent to which it can successfully transition to a services-led economy.

For markets: No one really knows what’s going on inside China – and that makes investing in it really hard. In developed markets, investors can look at economic data that they trust and express their views. In China, there is a large credibility deficit: the economic data is possibly dodgy, the government routinely intervenes in the markets and, perhaps most crucially, the value of the yuan is set by government policy rather than by free markets. That hampers investor confidence and, usually, long-term investment returns.

Originally posted as part of the Finimize daily email.

The top 2 financial news stories in 3 minutes. Join over 400,000 Finimizers

Read next

Sign up to Finimize

Get the two most important global financial news stories each day. Sent at midnight UK time.

Get started with one email a day

The top financial news stories in 3 minutes.