China’s government is highlighting the positive in its sputtering economy, saying a transition from industry toward services is making headway. But the latest snapshot of economic performance suggests that shift is going to be arduous.
In reporting that economic growth dropped to 6.9% last year, the government’s statistics bureau said Tuesday that for the first time services accounted for more than half of the economy, climbing to 50.5% from 48.1% the year before. Meanwhile, manufacturing’s share shed more than two percentage points, falling to 40.5%.
The statistics bureau chief, Wang Baoan, told a news conference that this year will see accelerated restructuring, with some older industries declining while new businesses are “vigorously developing, further stimulating the vitality of the market.”
Rather than rapid growth in services and consumption, some analysts said the restructuring is more a reflection of the downturn in China’s traditional industrial growth drivers. Growth rates in both the services and industrial sectors slowed from a year earlier, with industry growing 6% and services 8.3% in 2015.
“You can achieve rebalancing in two ways: you grow the smaller bit faster or you shrink the larger bit,” said Oliver Barron, China research director with North Square Blue Oak investment bank. “Clearly they’re achieving restructuring. But it’s mostly from the slowing industrial sector. It’s not like they’re all of a sudden getting double-digit growth rates because of great government policy.”
After years of Chinese leaders saying the economy needs to shift away from growth driven by investment in factories, roads and other assets, a slowdown now entering its sixth year is making that transition more necessary than ever. As the world’s second-largest economy, China has accounted for up to a third of global growth in recent years, so gearing up services and consumption matters at a time that many other emerging and developed economies are sagging.
Consumption’s contribution to economic growth last year reached 66.4%, up from 51.6% of growth in 2014, the statistics bureau said Tuesday. While disposable income outperformed the economy, increasing 7.4% last year, many analysts said overall consumption figures generally include government spending, unlike statistics provided by most other nations.
Beijing hasn’t released detailed statistics yet. But of the 51.4% of the economy made up by consumption in 2014, only 37.9% was household spending, according to official figures.
A decision by China’s military to buy “more uniforms and boots for the winter will affect retail sales,” said Cliff Tan, researcher with Bank of Tokyo-Mitsubishi UFJ. “Now that’s still cash flow and will help support some enterprises, but it’s not quite the same thing as gamers shopping online.”
A significant impediment to the transition is government policy itself. While 2015’s 6.9% economic growth rate was a marked step down from 7.3% in 2014 and the slackest pace in a quarter century, economists said the government is still setting growth rates too high and will have to spend heavily to meet them.
Such spending sprees have typically favored old economic drivers–less-efficient state companies and industries, some afflicted by excess capacity–in part to avoid disruptive layoffs and bankruptcies. “Government policies are slowing the transition by still propping up some old industries, in an effort to spread the pain over multiple years instead of a quick one-off adjustment,” said IHS Global Insight economist Brian Jackson.
President Xi Jinping has said a growth target of 6.5% is necessary to meet a goal aimed at doubling its citizens’ income between 2010 and 2020. On Tuesday, Mr. Wang, the statistics head, said China planned to maintain a “reasonably high” rate of economic growth and that such a pace would help smooth out volatility.
According to Minsheng Securities Co., China’s infrastructure spending would need to grow by at least 18.7% this year for the country to reach the 6.5% target.
Government spending binges in the past haven’t much benefited private companies, for whom funding costs remain high. The downturn is making things worse, economists said, with more new lending going to cover old loans, crowding out productive new investment.
State-owned companies account for 30% of the country’s total corporate assets but receive 80% of total bank loans, the equivalent to $16 trillion or roughly 150% of China’s gross domestic product, according to estimates by Banco Bilbao Vizcaya Argentaria SA.
One part of the service economy that stormed ahead in 2015–financial services–isn’t likely to provide as big a boost this year. During the first three quarters of 2015, financial services contributed a strong 1.5 percentage points to economic growth, with investors rushing to buy stocks as the market rose and then sell them as shares plunged.
Now market activity is shrinking, with investors facing losses as Beijing steps up an investigation into the securities industry and pressures major shareholders not to sell.
The number of new investors in the fourth quarter of 2015 was 71% lower than at the markets’ peak in the second quarter, according to China’s stock regulator, while an industry group representing the stock exchanges said the volume of shares traded dropped more than 36% in the fourth quarter from the second quarter.