When asked during the Davos World Economic Forum regarding China’s weakest economic growth numbers in decades, it appears Chinese economics ministers weren’t all that alarmed. They chalked up the soft numbers to the necessary pain involved in China’s transition plans. China is working on transforming its economy from being mostly export-driven to consumption-driven. The officials cite this transition as the reason for China’s economic weakness and as such, China’s GDP weakness shouldn’t be cause for alarm. This is asking for too much.
The world has a lot to worry about as far as China’s economy is concerned. After all, along with the US economy, the Chinese economy is a stabilizing force in the global economy. When the global financial crash of 2008 triggered an economic tsunami from the US to Europe and other markets, Chinese stability offered a refuge for investors looking to protect their assets. China played an outsized role in helping stabilize the overall health of the global economy. Investors should be alarmed that this safe haven is showing signs of economic distress. Besides its slowing economic activity, China is also facing serious risks in the form of a huge glut in housing, declining housing prices, and a huge amount of debt in the finance black market.
China’s weak GDP figures highlight that not everything is rosy in China’s transformation to a consumption-driven economy. Paired with the current anti-corruption drive which disguises the ongoing power struggle within the Chinese Communist party and bureaucracy, it appears China might run out of political will to take its economic transformation to its furthest logical conclusion. Why? This transformation might entail a lot of pain at the grassroots and consumer level. Considering the high amount of existing popular resentment against government policies (primarily in the realm of land and labor disputes), the Chinese Communist party might be already walking on thin ice politically. Truly pushing the envelope and unleashing a lot of pain as it transitions the economy to a consumption-driven model might be the straw that breaks the camel’s back. Don’t expect the Chinese government to put the pedal to the metal as far as economic reforms are concerned. The political will just might not be there.