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Explainer: Why China's economy is worse than it looks

BEIJING — China’s economy is slowing, and the slowdown is likely worse than Beijing says.

Garment factory workers in Guangzhou, China.

Garment factory workers in Guangzhou, China.

BEIJING — China’s economy is slowing, and the slowdown is likely worse than Beijing says.

China announced Monday (Jan 21) that its economy grew 6.4 per cent in the final three months of last year compared with a year earlier. For the full year, according to official data, the Chinese economy grew 6.6 per cent.

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The figures suggest China’s economy is posting new, but manageable, lows. The three-month number shows the slowest pace since the global financial crisis a decade ago. The annual data shows the weakest pace of growth since 1990, when China’s economic miracle stumbled in the aftermath of the crackdown on protesters in Tiananmen Square the year before.

Still, the figures indicate only a modest downshift from earlier levels. They paint a picture of a maturing economy gently coasting toward a slower but more manageable growth rate.

More detailed data tell a different story.

From investment to consumer spending to factory activity, the Chinese economy slowed markedly in the second half of the year.

That is bad news not only for Beijing, which is contending with President Donald Trump’s trade war, but also for a world that has long looked to China for a helpful economic boost.

Some economists say the picture will brighten later in the year, and figures for the last month of 2018 suggest the slowdown is bottoming. But recent moves by the Chinese government show its leaders feel the economy needs a helping hand.


Detailed monthly data released Monday suggested the economy picked up in December, as Beijing took steps to rekindle growth.

Retail sales and industrial output ticked up in December from November, suggesting consumers and businesses alike were feeling a little better as the year came to an end.

But those monthly figures could not fully make up for a lackluster performance in the second half of the year.

Retail sales slowed markedly during those last six months, weighted by a steep tumble in activity at China’s car dealerships and broad weakness in smartphone sales. Investment in fixed assets like new factories and office buildings was anemic.

“China’s economy has slowed significantly in recent months,” said Mr Louis Kuijs, a China specialist at Oxford Economics, a large consulting firm.

The question now is whether an improvement in December will carry over to the start of 2019.

The Chinese government is trying to nudge growth along without adding to the country’s vast pool of debt accumulated during the past decade. While China still has many ways to rekindle growth, many of those options have difficult trade-offs.


China’s economic problems began before Trump began imposing tariffs on Chinese-made goods. That said, the trade war is not helping.

Activity has also slowed lately at many export-oriented factories. They overproduced in the autumn, rushing to ship goods to the United States before a feared increase in tariffs on Jan. 1 that did not end up happening. Importers in the United States found themselves with full warehouses and have cut further orders. Many Chinese factories have eliminated overtime and looked for other ways to trim employment costs.

“Manufacturing has sunk from buoy to anchor over the past two quarters,” the China Beige Book, an economic consulting firm, concluded in an analysis last month.

The Chinese government had hoped that the services sector would expand when manufacturing contracted. But the overall economy remains so dependent on manufacturing that the services sector has also weakened in recent months, the China Beige Book concluded.


Some economists note that the biggest factor driving the weakness in retail sales in China, which by some estimates has accounted for half or more of the entire slowdown, is a sharp fall in auto sales.

Auto sales have been falling since summer, with sales in December down a precipitous 19 per cent from a year earlier.

But China had a modest tax break for car buyers in 2016 that became smaller in 2017 and then disappeared entirely last year. Those tax policies may have pulled ahead some demand to 2016 and 2017, leaving the market poised for a drop last year.

“It is because we had a high number in 2017 that the 2018 market has so much pressure,” Mr Cui Dongshu, secretary-general of the China Passenger Cars Association, said in a phone interview.

Sliding sales at car dealerships prompted a wave of production cuts at assembly plants across China. That in turn cut into demand for auto parts, steel, glass and other industries.

But help may be on the way. Lian Weiliang, vice chairman of the National Development and Reform Commission, said at a news conference last week that China would draft policies to “stabilize” consumption of cars and household appliances.


Some economists argue that after the next few months, the Chinese economy will start to improve.

The Chinese government has allowed big-ticket projects like new subway lines in many cities to move forward, and it has pumped more money into the financial system. China’s leaders have also pledged to cut taxes to shore up sagging business sentiment.

The efforts “will boost the economy in the second half of this year,” said Mr Shen Jianguang, chief economist at, a big Chinese online retailer.

One big option that China still has: help the housing market.

Building and outfitting homes and other buildings represents as much as a quarter of the country’s economic activity by some estimates.

Along with slumping car sales and a sharp drop in the stock market, a weakened housing market dampened consumer confidence.

China could take measures like loosening limits on mortgage lending and easing the ability of property developers to buy land and deal with their debt.

But that approach comes with dangers. The sector is already overbuilt and plagued with speculation, something Chinese authorities have long tried to contain.

“Property easing will be used as a last resort, not a priority,” said Mr Tao Wang, a China economist at the Swiss bank UBS. THE NEW YORK TIMES

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