THE BLOG

China's Economy May Have Slowed, But There's Plenty of Fire Left in the Dragon

22/04/2014 11:35 BST | Updated 17/06/2014 10:59 BST

Concerns over the Chinese economy have been bubbling under the surface for a couple of years now and recent news from the world's second largest economy have done nothing to assuage these fears.

This week saw the publication of China's GDP results for Q1 of this year. Output dipped to its slowest level of growth in 6 consecutive quarters, as the valuable construction sector slowed quickly. The economy grew on a year-on-year basis by 7.4%, slightly higher than the consensus estimate of 7.3% - a figure that would have been the lowest growth level since 2010.

The 7.4% figure is not a disaster in itself but is a perpetuation of a recent trend of disappointment that sometimes masquerades as impending disaster. A natural slowing of the Chinese economy has been occurring through the past 18 months, as Premier Li attempts to re-engineer growth from the characteristics of an emerging market power to one of a developed nation.

This relies on a move away from the economic model that has driven the Chinese economy to its current position. Industrial production and factory output had allowed China to become the world's workshop through the 90s and 2000s, but the emergence of a Chinese middle class is what will allow the country to challenge America's might as the world's strongest consumer.

This is not an overnight transition, however, but the costs are being already felt by a slowing of overall output. I have previously described the task ahead of the Chinese authorities as like trying to change a tyre on a car that is not sat in a lay-by but instead remains charging down the road at 100mph.

Retail sales figures this week are encouraging for those who believe rebalancing does not deserve the high wire level of risk that I ascribe to it. Retail sales were better than expected, growing by 12.2% in March compared with 11.8% in February.

Overall, the government has targeted a figure of 7.5% growth through 2014. This week's figures are not good enough and will promote thoughts of further stimulus measures. Last month Beijing announced a "mini-stimulus" that contained none off the white elephant spending measures that previous packages have been dripping with. Instead came increased spending on railways and help via loans and tax breaks for small and medium sized businesses.

Elsewhere in China credit is being restricted, in an effort to control bubble-like conditions in property and housing loan markets. Provincial governments are swimming in debt, used to fund local building efforts, while "shadow banking" investment products - to the tune of $1.8bn in some reports - may be under water. Beijing has cracked down on lending but a crunch on credit is a crunch on growth everywhere, not just in the Far East.

Much like the developed world, emerging market economies are experiencing a slow grind to growth in 2014. Still, most world economies would kill for a 7.4% growth figure through 2014.

Jeremy Cook is chief economist at the international payments company, World First.