Spending, services are bright spots

As China's GDP growth slowed to a six-year low of 6.9 percent in the third quarter, officials cited the resilient services and consumption sectors as evidence for optimism.

China's traditional growth engines, characterized by smokestack industries, are in deep trouble, and that is not likely to change in the short term.

For economic observers who like to look beyond headline GDP numbers, the questions now are: What are the new engines? Are they big enough? And how long it will take for them to take up the slack?

Perhaps no one has a better sense of these questions than Chinese investment tycoons. Liang Xinjun, CEO of Shanghai-based Fosun International, says his conglomerate is "unswerving" in betting on China's middle class and their consumption in education, healthcare and lifestyle.

They are not just words. This year marked the busiest buying year for Fosun. In April, it took a 25 percent stake in Cirque du Soleil, one of the world's best-recognized entertainment brands, and it entered into a joint venture with British travel company Thomas Cook. In January, Fosun took over the French resort chain Club Med for $1.3 billion.

"We'll invest where China's middle class spends. Our investment model is 'combining China's growth momentum with global resources'," Liang told a recent forum.

"Chinese people have solved their basic living problems," says Sheng Laiyun, spokesman for the National Bureau of Statistics. "Now they want to eat healthier, travel abroad and go to the cinema. The so-called upgrading of consumption structure is one major force to prop up the economy."

This force is showing its potency, particularly at a time of unprecedented weakness in traditional industries. In the first nine months of the year, service industries for the first time made up more than half (51.4 percent) of GDP, 10.8 percentage points ahead of manufacturing. Consumption contributed 58.4 percent of growth compared with 49.1 percent a year ago. Retail sales strengthened steadily from 10.5 percent in July to 10.9 percent in September and 11 percent in October, defying the traditional wisdom that slower growth would weigh on household spending and retail sales. Online retail sales even surged 36.2 percent.

A breakdown of the service sector showed that the stock market rout in July and August had dented - but not cratered - the financial sector. Value added by the sector slowed to 16.1 percent year-on-year in the third quarter from 19.2 percent in the second. But "other services" - a category compiled by the National Bureau of Statistics that includes such services as information technology, leasing, science research and technology services, education, health, culture and social works, strengthened to 9.5 percent from 8.7 percent in the second.

This category, which had an output of 9.7 trillion yuan ($1.5 trillion; 1.4 trillion euros) in the first three quarters and surpassed the financial sector's 4.3 trillion yuan, had a substantial role in keeping growth from slumping further below the government's 7 percent target, Bloomberg notes.

Although much lauded as the new engine, the new economy should not be seen as a replacement for advanced manufacturing, economists say. Manufacturing's value, standing at nearly 20 trillion yuan in the first three quarters, still contributed 40.6 percent of the added value and the bulk of employment.

The way Bloomberg compiles its China Real Activities Index offers a glimpse into how it understands the new economy. Its new-economy index is comprised of five indicators: consumption of medicine, clean energy electricity output, exports of vehicles, production of communication equipment and computers, and output of private firms. That contrasts with the makeup of the old-economy index, which includes thermal electricity production, ferrous metal ore production, and state-owned enterprises' output. That shows that the new economy is not only about consumption and services.

Wei Jie, an economics professor with Tsinghua University, says when he examined customs data, he found some industries doing well: equipment exports to Central and South Asia grew fast.

"I'm not sure China's submarine exports to Pakistan count as an 'equipment export'. But that's a titanic figure and pulls up lots of industries. What interested me is that private firms exceeded stated-owned enterprises in this sector," he says.

Richard Herd, chief China economist at the Organization for Economic Cooperation and Development, says China's GDP has been underestimated because some value-creation has not been counted, including research and development expenditures and rental income. If added, the technology hub of Shenzhen, for example, would see its GDP rise by 10 to 15 percent, and its GDP per capita would be nearly $30,000.

(China Daily Africa Weekly 12/11/2015 page21)